02 February 2021

By George Asante, Absa Global Markets

The COVID-19 pandemic has made the underlying structure and resilience of African financial markets a critical matter for consumers of capital as well as domestic and international investors, as the continent copes with the challenges of returning to sustainable growth.

Africa needs critical mass to push it towards a state where growth, prosperity and security are the norms and not the exception. It also needs to get to the point where it can be the master of its destiny to ensure the sustainability of solutions.

The global health and economic crisis triggered by COVID-19 has brought into sharp focus the need for continuous investment into the economies that make up this incredible continent. COVID-19 has also provided us with many learnings and lessons that we cannot discount and must incorporate into the way we invest and do business in the future.

Although we are still at the bottom of this cycle of change and have only just started rebuilding after its tornado-like effects, we can begin applying key learnings. We do not want Africa to be at a point where we lose the value of learning from this pandemic and as result not make the necessary changes that will move this continent forward.

Some of the critical learnings relate to the need to create an enabling environment for financial market participants. This is to make it easier for financial markets to play the role as an efficient platform for mobilising resources to power the continent's growth and prosperity, as well as facilitating trade within the continent.

It is also important to note that Africa will be on the wrong path if we think we can progress as individual countries without the need to work together. The reality is that the continent can do a lot more from a scalability perspective and through leveraging the different strengths of respective countries through cooperation.

From a capital markets perspective, the starting point for working together will be the harmonisation of market infrastructure, legal frameworks, regulations and market practices, with a purely African lens, to accelerate the road to scale. In the context of recent de-globalization, a call for Africa to work together will be bucking this trend, but this is probably the best way to position the financial markets to drive initiatives like Africa Continental Free Trade Agreement.

Harmonising the financial markets landscape requires a detailed diagnostic tool to understand the underlying factors that have, so far, kept this continent from reaching her potential in terms of attracting its fair share of investments from both local and foreign investors alike by answering the critical question of ‘What is it that is holding us back'? Armed with this data, the continent can move faster to reform in a way that helps us shape our future.

That's where the Absa Africa Financial Markets Index comes in. Now in its fourth year, the Index, produced by the Official Monetary and Financial Institutions Forum, has become a benchmark for policymakers to gauge countries' performance across a range of indicators important for financial market development, focusing on six fundamental pillars:

  • Market depth
  • Access to foreign exchange
  • Market transparency, tax and regulatory environment
  • Capacity of local investors
  • Macroeconomic opportunity
  • Legality and enforceability of standard financial markets master agreements

The research is a development index focused on the financial markets and works as a benchmarking tool that tracks the maturity of respective financial markets, as well as the openness and ease of accessibility of financial market products to suppliers of capital or investors, as well as people who consume capital.

This year, the impact of COVID-19 had a dire impact on markets, the economy, as well as the health of citizenry, and that can be seen in the declining liquidity that we've seen across financial markets.

At the start as well as during the height of the pandemic, global investors pulled back from the continent, which reduced the amount of liquidity available in different securities. At the same time, we saw local investors move out of certain type of products into more cash, as they looked to preserve liquidity and cash in the short term, given the volatilities and vulnerabilities that the pandemic was drawing.

The Index has proved its worth, because its key take-outs allow for better planning from a regulatory and policy making point of view, as well as crucial insights that will aid countries to rebuild economies faster.

Key benefits

Primary findings from the 2020 Index show that the average overall country score dipped to 51 in 2020 from 53 in 2019. This score, which is measured out of 100, declined partially due to slower market activity in the first half of 2020 and stricter scoring in some indicators.

The good news is that countries performed best in the market transparency and tax, and regulatory environment pillars, scoring 67 on average across these two metrics.

Also, worth highlighting is the fact that green finance is gaining momentum, with Nigeria, Kenya and Egypt issuing sovereign green bonds in the past year. This is not surprising, given the emphasis being placed on environmental, social and governance (ESG) issues now. Together with Rwanda establishing a green investment bank and Uganda punting a post-disaster environmental restoration fund, this all translates into a growing maturity among African financial markets.

The Index pulls together all the sub-markets into one benchmark, allowing governments to see a holistic view of where they are in terms of being able to attract domestic and international investments.

This pinpoints areas that policymakers need to focus on to reform markets at a faster pace than has been done historically. Instead of having to do all the groundwork and develop an understanding of the issues so they can determine how to fix them, this is now readily available to them.

Perhaps one of the biggest advantage countries are seeing as an output of the Index is that individual regulators can now track the knock-on effects of regulations on the financial market’s ecosystem, beyond the subsector they directly regulate. Before, the impact of regulatory actions in one submarket on another was not independently and transparently tracked. For example, the Egypt and Nigeria equity markets have benefited greatly from recent reforms in the foreign exchange markets which subsequently spurred economic recovery and development.

There is no doubt that we will see more financial volatility as the result of the pandemic, and this is unlikely to be the last of such global shockwaves. However, Africa's rapidly maturing and strengthened financial markets bode well for our ability to withstand such stress tests, as we can pull together to attract our fair share of both domestic and international capital, for the greater good of all Africans.