The Absa Africa Financial Markets Index evaluates the financial market development in 20 countries and highlights economies with the clearest growth prospects. The aim is to show not just present positions but also how economies can improve market frameworks to meet yardsticks for investor access and sustainable growth. The index assesses countries according to six pillars: market depth; access to foreign exchange; tax and regulatory environment and market transparency; capacity of local investors; macroeconomic opportunity; and enforceability of financial contracts, collateral positions and insolvency frameworks.
In addition to quantitative analysis, OMFIF gained additional insights by surveying over 40 policy-makers and top executives from financial institutions operating across the 20 countries, including banks, investors, securities exchanges, central banks, regulators, audit and accounting firms and international financial and development institutions.
The report finds that:
- South Africa tops the index largely due to its sizeable lead in ‘market depth’. While it is likely to remain an outlier in this pillar, the creation of new bourses and key mergers between existing ones will improve the standing of other countries in the coming years. This year, Botswana, Kenya and Namibia join the ranks f countries that score over 50 in Pillar 1, which also includes Nigeria, Mauritius and Ghana. Issuance of new debt with longer tenor has lengthened the yield curve in Ghana, Nigeria and Tanzania. The creation of new products, such as green and blue bonds, could enhance market activity and attractiveness to foreign investors in the coming years. Assigning primary dealers will help create a secondary market in jurisdictions where none yet exist.
- Other countries are catching up in the rest of the index. Egypt has the highest score in ‘macroeconomic opportunity’ while Mauritius and Kenya claim the two top spots in ‘legality and enforceability of standard financial markets master agreements’. Ethiopia, although lagging behind, has significant potential for improvement in the coming year. It has announced plans to establish a stock exchange in 2020. Local banks and other financial service firms are in the process of adopting international financial reporting standards.
- Countries perform best collectively in ‘market transparency, tax and regulatory environment’, with 13 out of 20 scorings above the average mark of 67. Favourable tax
regimes in different jurisdictions incentivise market activity and the entry of new players. Survey respondents in Rwanda, Tanzania, Kenya, Ghana and South Africa gave positive feedback for their respective tax systems. Uganda, Cameroon and Senegal have earned international corporate credit ratings for the first time.
- ‘Legality and enforceability of standard financial markets master agreements’ improved significantly, with the average score growing to 55 from 47 last year. Amendments to insolvency laws and processes boost the scores of Kenya, Morocco and Rwanda. Ghana, Morocco and Seychelles are considering enacting some form of netting legislation, which would earn them higher marks in coming years.
- ‘Access to foreign exchange’ is the only pillar where average scores fell. Aggregated reserves grew modestly to $244bn from $233bn last year, but countries like Zambia and Angola are running low, leaving them potentially vulnerable to foreign exchange risk. There is also a high disparity in interbank foreign exchange turnover across countries. South Africa’s turnover is 466% of GDP, but the index average without it is only 13%.
- Egypt’s strong performance in ‘macroeconomic opportunity’ is driven by steady economic and export growth, along with a decline in non-performing loans. It does well in macro reporting and transparency, topping Pillar 5 as it completed the International Monetary Fund’s reform programme earlier this year.
- The amount of pension assets varies greatly among countries in the index. Mauritius leads with $4,331 per capita, followed closely by South Africa, Namibia, Botswana and Seychelles. Meanwhile, 11 countries have less than $100 pension fund assets for every person. Expanding the coverage of pension schemes increases the number of investible assets available, enhancing local investor capacity. Because of limited product availability, pension funds in some countries are constrained to investing in sovereign securities. Building up pension fund assets through innovative and inclusive schemes can help spur demand for a wider range of financial products and lead to greater market activity.
- There have been significant improvements for individual countries since the index was first established in 2017. Since then, countries have taken steps to align their local market infrastructure with global standards. Tracking these changes annually helps measure the gradual progress of Africa’s financial markets and provide guidance on how countries can advance further.