Innovations in sustainable finance and digital transformation, alongside important initiatives in transparency and regulation, will help reinvigorate Africa’s financial markets as they recover from the impact of Covid-19, according to research in the latest African Financial Markets Index from Absa and OMFIF.
- Out of 23 countries in the index, 19 score lower than last year. This decline reflects more difficult market conditions, methodological changes and the inclusion of environmental, social and governance indicators in the index. Despite the fall in scores, few examples reveal an underlying deterioration in the policy, regulatory or developmental environment in any of the index countries.
- The inclusion of ESG initiatives in the formal scoring highlights important developments and opportunities in this area, though at the cost of impacting the scores of those countries for which work is at an early stage. Only 13 countries in the index have ESG-focused policies in financial markets and nine countries have introduced sustainable finance products.
- South Africa, Mauritius and Nigeria maintain their lead in the index, though with scores slipping in 2021 for all three.
- Ghana and Uganda enter the top five for the first time, both earning points for progress in Pillar 6: Enforceability of standard master agreements.
- Nigeria gains the lead in Pillar 3: Market transparency, tax and regulatory environment. Namibia maintains its lead in Pillar 4: Capacity of local investors, while Egypt tops Pillar 5: Macroeconomic opportunity. South Africa remains on top for Pillar 1: Market depth and Pillar 2: Access to foreign exchange. It ties for first with Ghana and Nigeria in Pillar 6: Enforceability of standard master agreements.
The index measures financial market development in 23 countries from across the African continent, highlighting economies with the most supportive environment for effective markets. The aim of the index is to show how economies can improve the market framework to bolster investor access and sustainable growth, and act as a benchmark for investors and policy-makers.
As a reflection of the global push towards sustainability, this is the first year that the index has included ESG indicators. The availability of sustainable finance products, such as green bonds and equities, now contributes to countries’ scores for Pillar 1: Market depth. The index also scores countries on policies that promote ESG initiatives in financial markets for the first time.
The introduction of these sustainability-focused indicators weighs down the scores for many countries in the index as developments in this area are often at an early stage. The average score in the index fell to 46.4 out of 100 in 2021 from 50.8 in 2020, reflecting markets’ muted performance in these new indicators. However, the new measures serve as targets for countries to work towards.
Charles Russon, chief executive of corporate and investment banking, Absa, said of the index’s findings: ‘While some might find it disheartening to see the average score across the board drop, Africa is navigating an extremely tricky economic atmosphere. Recovery from the Covid-19 pandemic has not been as straightforward as we would have hoped last year, and this has had a large impact on the twin challenges the continent faces in reinvigorating financial markets post-pandemic, while strengthening market infrastructure.’
‘However,’ he continued, ‘We’ve seen a lot of positive progress in countries’ efforts to upgrade market infrastructure and regulatory support through the development of technology-based tools which will help future-proof Africa’s financial markets. With countries using innovation to boost local markets and build a broader investor base, there are plenty of reasons to be hopeful about the future of Africa’s macroeconomic landscape.’
‘The index is evolving to stay relevant, recognising the greater role that sustainability plays in market development, as well as the importance of mitigating climate-related risks to the financial system, especially for African countries that are more vulnerable to the effects of environmental deterioration,’ said David Marsh, chairman of OMFIF. ‘Innovations in sustainable finance and market infrastructure will be critical to ensuring that African markets remain competitive and future-proof.’