‘Extreme’ Resilience Test Ahead For African Financial Markets - Emerging Market Views

‘Extreme’ Resilience Test Ahead For African Financial Markets

The coronavirus pandemic and its economic impact will pose an “extreme test of resilience” for African countries’ developing financial markets, according to a joint report by Absa Group and the Official Monetary and Financial Institutions Forum (OMFIF).

The highlight of the annual study is the Absa Africa Financial Markets Index, which shows the Covid-19 pandemic “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 index is intended to help measure African countries’ performance across a range of indicators important for financial market development, such as market depth, foreign exchange availability, transparency, and macroeconomic opportunity.

South Africa again tops the index by a wide margin, owing 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-recognized legal frameworks.” Nigeria, Botswana, and Namibia make up the rest of the top five.

The report said 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, with the report noting that outflows of international capital impacted the region’s stock markets as liquidity dropped in the first half of the year.

“This decline demonstrates the importance of deepening financial markets and encouraging local participation,” the report said.

In terms of ‘macroeconomic opportunity’, the report said the Ivory Coast “has one of the brightest growth outlooks,” and is one of five countries where real GDP growth has averaged above 5% over the last five years. South Africa is in the top spot, as “despite its worsening growth outlook, it has a low non-performing loans ratio and relatively low external debt to GDP ratio.”

Ghana has made the most progress on ‘access to foreign exchange’, with the report noting increasing foreign exchange liquidity, as measured by interbank foreign exchange turnover. Meanwhile, Angola has put rules in place to route more foreign currency through its commercial banks. Additionally, “survey respondents said efforts in Nigeria to unify its multiple exchange rates and South Africa’s easing of capital controls for the broader economy would increase international participation in the market,” it said.

Countries’ scores in ‘legality and enforceability’ of standard financial markets master agreements deteriorated.

The report argued that while the pandemic has disrupted markets, it has also presented opportunities for capital market development. As an example, pointed to the $3 billion in three-year “coronabonds” issued by the African Development Bank in March to help finance the fight against Covid-19.

Green finance is another area that has experienced growing momentum in the region, the report said. Rwanda is establishing a green investment bank, while Uganda will develop a fund for post-disaster environmental restoration. Nigeria is set to launch its third sovereign green bond. Kenya issued its first green bond in 2019 and has introduced financial incentives to invest in such bonds, such as exempting investors from paying withholding tax on interest earned. Egypt issued a green bond in September, the first in the Middle East and North Africa.