African markets still innovating amid liquidity struggles, revealed ABSA AFMI Report
ABSA, a leading financial services provider, revealed that innovations in sustainable finance, 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. The top financial services provider delivered this valuable insight during the presentation of its latest Financial Markets Index on Wednesday, October 13, 2021.
The latest African Financial Markets Index which was produced by a joint research effort of ABSA and OMFIF 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.”
He continued, “However, 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 ABSA African Financial Markets Index tracked performances in key markets on the continent. Divided into six pillars, the report measured all 23 countries against these pillars. In Pillar 1: Market depth, scores dip by an average of 1 point to 40.5 from 41.5 in 2020 due to lower equity market turnover, which has persisted since the onset of the Covid-19 pandemic. While market capitalisation rose in almost all of the countries in the index, it was not enough to offset weak trading activity. Only nine countries have introduced financial products that can be classified as ‘green’ or ‘sustainable’, with green bonds available in seven countries, either on exchanges or over the counter. Kenya and Morocco score highest in this indicator for having green or sustainable bonds, equities and mutual funds in their markets.
Foreign exchange reserves grew by 24% in Pillar 2: Access to foreign exchange, with South Africa coming first and Eswatini moving up 11 places. However, a lack of liquidity in the FX markets, as measured through interbank figures, weakened across almost all countries.
Nearly all countries’ scores declined in Pillar 3: Market transparency, tax and regulatory environment due to lower marks in capital market development. Poor performance on the new indicators that look at incentives for issuance of sustainable financial instruments, integration of sustainability factors in financial market standards and adoption of climate stress testing also contributed to the decline.
Namibia tops Pillar 4: Capacity of local investors once again, earning full marks for having a deep pension market relative to the size of its population and securities market. However, weak potential on the part of the domestic pensions market meant that 19 countries failed to score over 50.
Countries generally performed best in Pillar 5: Macroeconomic outlook, achieving an average score of 62. Egypt regains the lead – which it lost to South Africa last year – propelled by strong gross domestic product growth in 2020. The macro impact of the pandemic continues to be felt in this sector with economic growth for many countries subdued and public finance showing strain.
Ghana, Nigeria and South Africa earn full points in Pillar 6: Enforceability of standard master agreements. Mauritius, Uganda, Zambia and Malawi miss out on joining these countries at the top of the pillar by not yet fully adopting standard master agreements.
“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”, he added.