A financial index that sheds light on winners and losers in Africa
South Africa’s pre-eminence as a financial powerhouse in Africa remains intact, but some challenges are coming from behind.
As shown in the table below, South Africa ranked first in the Absa Africa Financial Markets Index for 2022, maintaining its ranking over the past two years, followed by Mauritius, Nigeria, Uganda and Botswana.
The index assesses the financial development of countries based on measures of market accessibility, openness and transparency.
The aim is to show how economies can reduce barriers to investment, which in turn can spur sustainable growth.
The index has become a benchmark for the investment community to assess the market infrastructure of African countries and is used by policy makers to learn from developments across the continent.
The index is based on six pillars:
- Market depthmeasuring the size, liquidity and diversity of national capital markets;
- Access to currenciesand the ability of central banks to manage the volatility of foreign capital flows;
- Market transparency, tax and regulatory environment;
- Capacity of local investorsbased on the potential of institutional investors to drive capital market growth;
- Macroeconomic environment and transparency, including transparency of economic data; and
- Legal standards and enforceabilityand their alignment with international financial market standards.
The index is sponsored by Absa and produced in conjunction with the Official Monetary and Financial Institutions Forum (OMFIF), a non-lobbying network for best practices in global public and private sector trading. It is important to emphasize that OMFIF is independent in the way it conducts its research and reaches its conclusions.
“When Absa and OMFIF decided in 2016 to produce a joint dashboard of capital markets development across Africa, the inspiration came from many angles, but we had one main objective,” says the Chairman of OMFIF, David Marsh. “We wanted to improve ways for African countries to learn from best practices across the continent.”
With the index now in its sixth year and expanded to 26 countries, up from 17 in the 2017 index, it has succeeded in creating a series of widely recognized benchmarks to measure and tout capital market progress.
Measuring capital market progress over the past six years indicates a continent brimming with confidence, eager to adopt international best practices and now firmly on the radar of international investors. The index has provided an indispensable tool for investors on the one hand, and for political markets on the other.
“We had several finance ministers and policy makers across the continent who wanted this information for themselves, and they wanted the index expanded to cover more countries,” said Garth Klintworth, head of global markets at Absa. Corporate and Investment Banking.
“Even though they performed poorly in some areas, it gave them a better understanding of what needed to be improved.
“All countries are looking for ways to increase domestic savings, reduce the risk premium paid in local capital markets, and reduce the cost of capital,” Klintworth says.
“This index gives them a policy tool to improve their market infrastructure and serve as a credible benchmark for stakeholders.”
While all African countries have had to deal with the disruption caused by the Covid-19 pandemic, 19 have improved their scores compared to 2021. This is largely due to widespread progress in developing sustainable financial markets, which are becoming increasingly important to global investors, says the summary of the index report.
Namibia, Uganda and Kenya are among the countries with the highest increase in scores. They have strengthened their environmental, social and governance (ESG) market frameworks and, in Kenya, climate risks have been integrated into financial stability regulations.
Greater product diversity also boosted scores for most countries, including Angola and Lesotho, which both launched their initial public offerings in the past year.
The index also recognizes the contribution of digital initiatives and innovations to the development of the African financial market. While not directly impacting the scores, the report highlights countries’ progress in modernizing market infrastructure, transparency and regulation using new technologies. It also highlights various financial inclusion initiatives that help broaden the domestic investor base.
- South Africa, Mauritius and Nigeria have maintained their top three positions this year as they continue to score high on measures of market depth, transparency and enforceability of legal agreements . SA scores particularly high on market depth, given the size of its capital markets.
- Uganda moves up two places to fourth, while Namibia and Kenya improve their rankings in the top 10. Scores for all three countries have increased due to progress in adopting ESG policies and frameworks.
- In terms of access to foreign exchange, Nigeria, Morocco and Uganda improved the most due to their relatively high interbank foreign exchange liquidity.
- South Africa, Egypt, Kenya and Mauritius score high on sustainability measures, with climate risk integrated into their financial stability frameworks.
- Survey respondents from 11 countries expressed concern about capital flight, rising prices and/or monetary tightening as a result of the Russian-Ukrainian war. Ghana was hit harder than most by these factors, and the country fell three places in the index to seventh.
- Namibia scores highest on a measure of ‘local investor capacity’ and has the largest pension funds per capita. Apart from a handful of Southern African economies, most countries have limited pension assets.
- In the macroeconomic environment measure, Botswana beats Egypt at the top of the rankings due to its low external debt, low share of non-performing loans and transparent data release.
“We want this index to be widely used across the continent, by both investors and policymakers,” says Klintworth. “As the years pass and we include more and more countries and gain a better understanding of the state of market infrastructure across the continent, we can see that Africa is emerging as a financial force. worldwide. We want to build on this in the years to come. »
Presented by Absa Corporate and Investment Banking (Absa CIB).