A financial index that illuminates winners and losers in Africa

South Africa’s pre-eminence as a financial power in Africa remains undimmed, but there are some challenges coming from behind.

As the table below shows, SA ranked first in the Absa Africa Financial Markets Index for 2022, retaining its ranking over the last two years, followed by Mauritius, Nigeria, Uganda and Botswana.

The index evaluates countries’ financial development based on measures of market accessibility, openness and transparency.

The aim is to show how economies can reduce the barriers to investment, which can in turn boost sustainable growth.

The index has become a benchmark for the investment community to gauge African countries’ market infrastructure and is used by policymakers to learn from developments across the continent.

The index is based on six pillars:

1. Market depth, measuring the size, liquidity and diversity of domestic capital markets;
2. Access to foreign exchange, and ability of central banks to manage volatility from foreign capital flows;
3. Market transparency, tax and regulatory environment;
4. Capacity of local investors, based on the potential of institutional investors to drive capital market growth;
5. Macroeconomic environment and transparency, including transparency of economic data; and
6. Legal standards and enforceability, and their alignment with international standards across financial markets.

The index is sponsored by Absa and produced in collaboration with the Official Monetary and Financial Institutions Forum (OMFIF), a non-lobbying network for best practice in worldwide public-private sector exchanges. It’s important to stress that OMFIF is independent in how it conducts its research and concludes on its findings.

Principal aim

“When Absa and OMFIF decided in 2016 to produce a joint scorecard of capital market development across Africa, the inspiration came from many angles, but we had one principal aim,” says OMFIF chair David Marsh. “We wished to improve the means for African countries to learn from best practice across the continent.”

With the index now in its sixth year and extended to 26 countries, up from 17 in the 2017 index, it has succeeded in creating a series of widely recognised benchmarks to measure and extol capital market progress.

Measuring capital market progress over the last six years points to a continent brimming with confidence, hungry 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 side, and policy 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,” says Garth Klintworth, head of global markets at Absa Corporate and Investment Banking.

“Even though they scored 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 lower the cost of capital,” says Klintworth.

“This index gives them a policy tool to improve their market infrastructure and serve as a credible reference point for stakeholders.”

While all African countries had to contend with the disruptions caused by the Covid-19 pandemic, 19 improved their scores relative to 2021. This was largely due to broad-based progress in developing sustainable financial markets, which is becoming increasingly important to global investors, says the index report summary.

Namibia, Uganda and Kenya are among the countries with the greatest increase in scores. They have bolstered their environmental, social and governance (ESG) market frameworks, and in Kenya climate risks have been incorporated into financial stability regulation.

Greater product diversity has lifted scores for most countries too, including Angola and Lesotho which both issued their first initial public offerings over the past year.

The index also recognises the contribution of digital initiatives and innovations to African financial market development. While not directly impacting scores, the report highlights countries’ progress in upgrading market infrastructure, transparency and regulation using new technologies. It also sheds light on various financial inclusion initiatives that help to build a broader domestic investor base.

Highlights

• SA, Mauritius and Nigeria maintained their positions in the top three this year, as they continue to score highly on measures of market depth, transparency and enforceability of legal agreements. SA scores particularly highly on market depth, given the size of its capital markets.
• Uganda rises two places to fourth, while Namibia and Kenya improve their ranking within the top 10. Scores for these three countries rose due to progress in adopting ESG policies and frameworks.
• In terms of access to foreign exchange, Nigeria, Morocco and Uganda improved most due to their relatively high reported interbank foreign exchange liquidity.
• South Africa, Egypt, Kenya and Mauritius score the maximum on sustainability measures, with climate risk incorporated in their financial stability frameworks.
• Survey respondents from 11 countries expressed concern over capital flight, rising prices and/or monetary tightening as a result of the Russia-Ukraine war. Ghana has been hit harder than most by these factors, and the country fell three places in the index to seventh.
• Namibia scores highest in terms of the ‘capacity of local investors’ measure, and has the largest per capita pension holdings. Outside of 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, small share of non-performing loans and transparent data releases.

“We want this index to be widely used across the continent, both by investors and policymakers,” says Klintworth. “As each year passes and we include 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 in global terms. We want to build on that in the years to come.”

Source: Absa Africa Financial Markets Index 2022

Brought to you by Absa Corporate and Investment Banking (Absa CIB).