Highlights:

• Average overall score dips to 51 out of 100 from 53 in 2019, partly due to slower market activity in the first half of 2020 and stricter scoring in some indicators.
• Countries perform best in ‘market transparency, tax and regulatory environment’, scoring 67 on average.
• South Africa and Mauritius maintain their lead in the index, scoring 89 and 79, respectively.
• Namibia tops ‘capacity of local investors’, while Mauritius retains its lead in ‘legality and enforceability of standard financial markets master agreements’.
• Green finance is gaining momentum, with Nigeria, Kenya and Egypt among countries that have issued sovereign green bonds in the past year.

COVID-19 has made the underlying structure and resilience of African financial markets a more important matter for domestic and international investors, as the continent grapples with returning to sustainable growth, the Absa Africa Financial Markets Index shows. Now in its fourth year, the index, which is produced by OMFIF, has become a benchmark for the investment community to gauge countries’ performance across a range of indicators important for financial market development.

The index has expanded to 23 countries, up from 17 in the inaugural publication. The latest additions, Eswatini, Lesotho and Malawi, reflect mounting interest in the region’s potential as a source of growth and opportunity.

‘As an organisation with deep Pan-African ties we are passionate about our contribution to the development of strong financial markets on the continent, the value of which has been highlighted by the challenges we are currently facing,’ said Daniel Mminele, group chief executive of Absa Group.

‘The AFMI report is a tool that helps to anchor policy discussions between regulators, exchanges, investors and corporates on how to promote open, accessible and transparent markets, which are necessary to mobilise capital and promote investment on the continent,’ Mminele added.

Key findings:

South Africa again tops the index by a wide margin, thanks to its deep capital and foreign exchange markets. Mauritius secures the runner-up position for the second year in a row, partly because of its alignment with internationally recognised legal frameworks. Nigeria, Botswana and Namibia round off the top five. Nigeria has relatively liquid markets, while Namibia and Botswana enjoy a high concentration of domestic assets from pension funds.

On average, countries’ scores in ‘market depth’ dropped by 0.6 from last year. The withdrawal of international capital impacted the region’s stock markets as liquidity dropped in the first half of the year, hampering countries’ performance in this pillar. This decline demonstrates the importance of deepening financial markets and encouraging local participation. 

Countries’ scores in ‘legality and enforceability of standard financial markets master agreements’ deteriorated by an average of 8.1, reflecting a change in the basis for assessment introduced in this year’s edition.

Scoring for the enforcement on close-out netting rules is based on data and legal opinions from the International Securities and Derivatives Association, leading to significant changes in the marks of some countries, including Kenya, Tanzania, Namibia, Angola and Botswana.

Although the pandemic disrupted markets, it has presented opportunities for capital market development. The African Development Bank issued coronabonds in March to help finance COVID-19 response measures.

Other sustainability initiatives are gaining momentum, especially in green finance. Nigeria, Kenya and Egypt are among countries that have issued sovereign green bonds in the past year. Rwanda is establishing a green investment bank, while Uganda plans to develop a fund for post-disaster environmental restoration.

‘Worldwide, investors are urging African countries to step up efforts to improve their financial market structures as a crucial means of returning to sustainable growth. The index tracks these developments and provides clear benchmarks for progress,’ said David Marsh, chairman of OMFIF. ‘African counties can help each other by learning best practice from each other – and then implementing it.’
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Download the report here.

The business activity index of the Absa PMI survey crashed to an all-time low of a mere 5.1 index points in April. The decline means that manufacturing output came to a near standstill during the nationwide lockdown, with almost all respondents reporting a decline in activity compared to the previous month. Indeed, many respondents indicated that zero production took place during the lockdown.

While some essential goods production continued during April, this was concentrated in specific subsectors. The current reading is about 25 points below the lowest level recorded during the global financial crisis, which suggests that the decline in actual manufacturing output will be well in excess of the drop recorded at the time (a 23% annual fall in April 2009). With no to little activity in the local economy, overall demand for manufactured goods also plummeted. The new sales orders index plunged to 8.9 index points in April and, like business activity, reached a record low by some margin (series since September 1999). Export sales also fell sharply in April. The employment index tracked activity lower but did not decline by the same margin as the business activity and new sales orders indices. About half of the respondents reported a decline in their staff complement. Formal-sector employment tends to lag activity trends, which means that further job losses are likely going forward.

After already slowing in March, supplier performance deteriorated further in April. In normal times, slower lead times point to increased activity and add positively to the headline PMI. However, COVID-19 related production stoppages have disrupted the global and local supply chains to such an extent that delivery times slowed sharply even without increased demand. Due to the inadvertent positive boost from supplier deliveries, the headline PMI only fell to 46.1 index points in April. This is despite unprecedented declines in the other four subcomponents and means that the headline reading does not provide a fair reflection of conditions on the factory floor in April. Most global manufacturing PMIs are affected, and in fact lifted, by this unique occurrence and the focus should thus rather be on the subcomponents of the PMI.

“The PMI survey shows the immediate, devastating impact the lockdown had on manufacturing output and overall demand. While some easing of restrictions from May should aid a slow recovery in coming months, a lot of manufacturing capacity will remain idle for some time,” said Miyelani Maluleke, Economist at Absa Corporate and Investment Banking. As a result, the index tracking expected business conditions in six months’ time ticked down further from a record-low already recorded in March.

Absa Group Publishes Sustainability Policy and Standard on Coal Financing

Absa has published its updated sustainability policy and standard for financing coal, affirming the group’s commitment as a responsible financier to address the negative impacts of climate change.

The updated policy and standard apply the Principles for Responsible Banking (PRB), which is the framework that establishes the role of the banking industry globally in helping to meet the objectives of the United Nations Sustainable Development Goals (SDGs) and the 2015 Paris Climate Agreement. Absa became a founding signatory to the PRB in September 2019.

“As a leading African bank, we recognise the impact of climate change and believe that we can play a shaping role in enabling sustainable economic and social development for the societies in which we operate.  Through this policy and standard, and by working together with our clients and customers, we will continue to integrate sustainability into our strategy and operations to drive positive change,” says Daniel Mminele, Absa’s Group Chief Executive

The accumulation in the atmosphere of greenhouse gases, especially those resulting from burning of fossil fuels such as coal, has been found to be the predominant cause of global warming and climate change. As a result, Absa will not fund new coal-fired electricity generation unless under extenuating circumstances that will be governed under strict guidelines. 

Effective immediately, projects requesting this type of funding will be evaluated using the following enhanced due diligence criteria:

• The Equator Principles;
• The OECD export credit eligibility criteria based on country, technology and plant size;
• Country commitments in their national development plans and nationally determined contributions to the Paris Climate Agreements;
• The World Bank Environmental, Health and Safety guidelines;
• A climate-related transition risk review to consider the project’s impact on water quality and availability, and air pollution; and
•  Independent advisors will assess feasible and cost-effective options to reduce project-related greenhouse gas emissions.

Absa encourages renewable energy technology such as wind and hydropower as a viable means to meet Africa’s power needs.

“We are already a leading player in financing the continent’s renewable energy, and we plan to intensify our focus on funding renewable energy projects that are environmentally, socially and economically feasible,” says Mminele.

Financing of new coal-fired industrial boilers or furnaces and projects using metallurgical coal will also be subject to enhanced due diligence.

Absa will continue to finance existing coal sector clients while supporting them to transition to more sustainable business models. Greenfield coal mining projects will not be financed unless they meet Absa’s enhanced due diligence criteria.

Absa will add standards for financing other climate-sensitive sectors in due course.

Absa and the African Development Bank Group (AfDB) have signed a US$ 250-million Risk Participation Agreement (RPA) which, when fully utilised, is estimated to mobilise over US$ 2 billion worth of trade business over three years.

The RPA was signed on the side-lines of the 2019 African Investment Forum (AIF) held in Johannesburg.

This facility, through a 50:50 risk sharing approach, will help to promote broad-based economic growth on the African continent through increased facilitation of import-export activities of African corporates and small and medium-sized enterprises, and increase intra-Africa trade and regional financial integration in line with the AfDB’s High 5 strategic priorities.

The RPA enables Absa and AfDB to equally share the risk of issuing trade finance facilities to African banks who have been unable to access trade finance support, due to a number of multinational banks exiting the continent through de-risking.

“Intra-Africa Trade is crucial to harness the potential of Africa, which boasts 60% of the world’s arable land and an abundance of resources. AfDB and Absa are Financial institutions which are intimately involved in the provision of financial services to support these flows.” says Temi Ofong, Deputy CEO of Absa Regional Operations and Chief Operating Officer, Absa Corporate and Investment Banking.

Carmel Kistasamy, Head, Global Development Organisations at Absa Corporate and Investment Banking says the agreement will benefit many African banks and their clients who have been unable to access trade finance after the 2008 financial crisis. Kistasamy sees demand for trade finance coming particularly from sectors such as agriculture and manufacturing.

She says the investment spending gap for Africa’s development continues to widen with latest estimates of between US$ 130 – US$ 170bn per annum. Small and medium-enterprises, which are seen as drivers for economic growth and job creation, require significant funding to expand their businesses and the private sector has a key role to play in cross border investment.

George Wilson, Head of Institutional Trade Finance at Absa Corporate and Investment Banking says AfDB has played a crucial role in assisting with reducing Africa’s trade finance gap.

“Not only does their involvement directly address their developmental mandate, it greatly expands the reach and capacity of Absa’s continental Trade Hub and has the potential to practically broaden the access to trade finance and developmental growth in Africa. We see this as a key stepping stone for even more impactful trade finance collaboration with the AfDB into Africa.” says Wilson.

“This deal is the result of what happens when you have the bravery to imagine and the will to get things done and we look forward to working with the AfDB to bring our clients’ possibilities to life.” says Ofong.

The rapid spread of COVID-19 infections across the world is the most serious public health challenge the world has faced in decades. While social distancing and movement control measures imposed by governments are proving to be an effective tool to contain the spread of infections, it is the burden on public health systems and the materially negative impact on ordinary people that make this a potential human tragedy.

Following the commendable example set by several African heads of state and political leaders in Absa’s presence markets, who have decided to make monthly donations from their salaries to public efforts to combat the virus, the executive directors and prescribed officers of the Absa Group have decided to make similar contributions in their individual capacities.

These are the Group Chief Executive, Daniel Mminele, the Deputy Group Chief Executive, Peter Matlare, the Finance Director, Jason Quinn, the Chief Executive of Retail & Business Banking SA, Arrie Rautenbach, and the Chief Executive of Corporate and Investment Banking, Charles Russon.

These executives will forego 33% of their monthly salaries for the next three months and donate these amounts to both the Solidarity Fund as well as the Group’s COVID-19 community support programmes. Colleagues at all levels of the organisation will be encouraged to consider making donations in line with their own personal circumstances.

“Having made an initial contribution of R10m to the Solidarity Fund, and to other programmes across several countries in which we operate, and delivered comprehensive customer relief programmes, the Absa Group is also in the process of expanding our efforts to make further contributions in all the markets in which we have a presence. The scale of the challenge requires that we work together to find solutions that can help us fight this massive threat to public health and our economic prospects,” said Daniel Mminele, Group Chief Executive of Absa Group.

We have noted the Central Bank of Kenya’s press statement this morning in which it announced the suspension of Absa Bank Kenya’s foreign exchange dealer license from 9 April 2020 until 15 April 2020. Absa Bank Kenya has also received official notice of same.

Absa Group and all its subsidiaries embrace a culture that endeavours to comply with national and international regulations at all times. We have stringent and world benchmarked Anti-Money Laundering CFT policies which are applied rigorously in all our operations.

When the Central Bank of Kenya raised its concerns, pending resolution of the concerns raised, we decided to cancel the two foreign exchange forward transactions concerned. These were being executed on behalf of highly reputable global financial institutions, which are regulated in line with best international practice. The transactions were executed at prevailing market rates. This was done to demonstrate our willingness to address fully the concerns of the regulator.

We are in ongoing consultations and discussions with the Central Bank of Kenya to fully resolve all matters raised in the shortest possible time. We remain committed to being a constructive participant in Kenya’s financial markets and to contributing to its further developments in the interest of all customers and stakeholders.

During the first quarter of 2020, the seasonally adjusted Absa Purchasing Managers’ Index (PMI) experienced the weakest quarterly performance since 2009. The PMI averaged at 45.9 index points, compared to 47.6 in the fourth quarter of 2019. The weak quarterly outcome was despite the PMI improving to 48.1 index points in March from 44.3 index points in February. Nonetheless, the PMI still remained in contractionary terrain for a fourteenth straight month.

The PMI was, to some extent, lifted by the supplier deliveries subindex moving higher in March, reflecting slower delivery times. In normal circumstances, a slowdown in supplier deliveries is seen as positive for the sector as it suggests suppliers are busier. However, in this case, the slowdown in delivery times is caused by global supply-chain disruptions. This phenomenon is observed in PMIs worldwide, but amplified in the South African manufacturing PMI as this component has a bigger weighting (as the subindex brings much-needed stability to the headline PMI and results in a better correlation with official manufacturing output figures in normal times). Without the inadvertent boost from supplier deliveries, the headline PMI would have turned out lower in March.

With this in mind, it is better to look at some of the PMI subcomponents that may provide a further indication of the current underlying conditions in the factory sector. Indeed, the business activity and new sales orders indices lingered around 11-year low levels in March. The nationwide lockdown imposed towards the end of March meant that most factories lost three working days compared to a normal March, while the 21-day lockdown will result in 10 working days lost in April.

Supply-chain disruptions mean that production is also not expected to return to full capacity immediately after the lockdown lifts. This suggests that the April factory figures will likely show a deep contraction. An extension of the lockdown is likely to result in some factories having to close permanently. This will have a sustained negative impact on production and could also result in further job losses in the sector. Indeed, respondents turned very pessimistic about expected business conditions going forward.

The index tracking expected business conditions in six months’ time fell to 29.1 index points in March. This is below the lowest reading recorded during the 2008/09 recession and, in fact, the lowest level on record (series since 1999). This means that the worst is yet to come for the manufacturing sector.