Capital markets play a critical role in a country’s economy. However, compared with the rest of the world, African countries’ financial markets continue to be fragmented and shallow, affecting their ability to access international capital and preventing them from better using domestic investments and savings.
Absa – together with the Official Monetary and Financial Institutions Forum, an independent forum for central banking, economic policy and public investment – launched the fifth edition of the annual Africa Financial Market Index last Wednesday. It measures the openness and attractiveness of African countries’ financial markets to foreign and domestic investment, using data from central banks, securities exchanges and international financial institutions.
Speaking at the launch, Absa group chief economist Jeff Gable said the index looked at 23 countries across the continent and showed how they could improve their capital market frameworks to bolster local and international investor access and sustainable growth.
Gable told City Press that the index assessed countries according to the following pillars: market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macroeconomic opportunity, and enforceability of financial contracts.
He said that, even though South Africa ranked first out of 23 countries with an overall score of 86, the country had fallen from a score of 89 the previous year.
“South Africa’s strong performance across pillars was hampered by economic growth. It scored full points on the sixth pillar, which calculates the enforceability of standard master agreements, and also scored higher than all countries on market depth and access to foreign exchange pillars.
“However, it scored relatively low – at 77 – on capacity of local investors and macroeconomic opportunity,” said Gable.
Market depth evaluates the size and liquidity of domestic capital markets, along with the diversity of listed asset classes, while access to foreign exchange (pillar two) measures factors that affect markets’ accessibility to international investors, including the existence and severity of capital controls, exchange rate reporting standards and the level of foreign exchange liquidity.
While local investor capacity evaluates the size of the pension fund market and its potential to drive market activity, macroeconomic opportunity looks at countries’ potential for growth by looking at both macroeconomic performance and quality of governance.
“South Africa moves down one place to second in pillar five [macroeconomic opportunity]. Despite having higher GDP per capita and a larger export market share than Egypt, South Africa’s bank loans deteriorated and the country continued to experience poor economic growth in 2020,” said Gable.
He said the overall index showed that all assessed countries struggled with the capacity of local investors pillar, averaging 31 out of 100.
This pillar evaluates local investor capacity based on the size of the pension fund market and its potential to drive market activity.
The Absa Financial Market Index shows that southern African economies have higher pension assets per capita. These regional economies scored well on pension assets per capita.
Gable said Namibia, Botswana, South Africa and Eswatini were all in the top five for this indicator, along with Mauritius.
“The early establishment of pension systems in these countries, as well as proximity to the JSE, enabled funds to build up sizeable assets compared with others in the region.
“About one-fifth of Namibia’s pension assets are invested in the common monetary area, which it shares with South Africa, Eswatini and Lesotho. Namibia has a deep pension market relative to the size of its population and securities market,” he said.
Gable added that, even though South Africa’ pension assets per capita had increased by 7.9%, the country had lost some points because its securities market growth outpaced that of pension assets.
Research showed that African financial markets endured another difficult year, with illiquid markets continuing to reduce scores due to the Covid-19 pandemic.
Vera Songwe, UN undersecretary-general and executive secretary of the Economic Commission, said the coronavirus had had a bigger negative impact on Africa than elsewhere in the world.
She said the scars of the past 18 months clearly showed in the sharp fall in average scores across index measurements.
The pandemic, she observed, had played a role in forcing the continent to pay more attention to adapting market standards to meet the needs of international investors wanting to diversify risks.
“The deepening of local financial markets is now universally seen as an optimal means of hedging against international economic fluctuation,” said Songwe.
“A robust and competitive market environment builds investor confidence, stimulates job creation and creates opportunities for growth.”