African financial markets moving up investment destination list

Mauritius, Namibia and Botswana may be favoured holiday destinations, but they don’t often come to mind as leading financial markets destinations in Africa. Yet the financial markets of these countries, together with African investment favourites SA and Nigeria, rank as the top five in the 2020 Absa Africa Financial Markets Index report.

The index measures the maturity of 23 of the continent’s markets by assessing their openness and accessibility, and guides policymakers on steps they can take to deepen and improve their markets to attract local and global investors.

The index is produced by the Official Monetary and Financial Institutions Forum in partnership with Absa. In the four years since its launch, the index has recorded a steady improvement in African financial markets: in 2017, just six out of 17 countries in the index achieved overall scores of more than 50 out of 100, while this year 11 out of 23 countries scored more than 50.

The overall score is an aggregate of ratings on six different measures, the first of which is the market depth — including the size of the markets relative to GDP, their liquidity and the diversity of products offered.

Absa’s report on the index notes that the market depth of most countries deteriorated this year as the Covid- 19 pandemic negatively affected market capitalisation and activity. But while the health and economic issues arising from the pandemic have been the dominant factor this year, the focus will now shift to recovering from the pandemic. Attracting investment to reaccelerate economic growth, and developing financial markets will be important for this, says George Asante, head of global markets for regional operations at Absa Corporate and Investment Banking.

Absa’s report notes that despite the pandemic, the Seychelles, Mauritius and Uganda grew their markets after introducing changes such as opening up to international central securities depositories and launching a new primary dealer system.

It also points to the Covid- 19 as having presented opportunities to develop capital markets with the African Development Bank issuing coronabonds to help finance responses to the pandemic in March. Other sustainability initiatives, especially in green finance, gained momentum with Nigeria, Kenya and Egypt issuing sovereign green bonds over the past year while SA’s JSE decided to expand its green bond segment into a sustainability division, which will include green, social and sustainability bonds. Rwanda is establishing a green investment bank, while Uganda plans to develop a post- disaster environmental restoration fund.

Investors looking for exposure to Africa are often invested in funds with country weightings aligned to market- weighted indices tracking emerging and frontier African countries. Investors are therefore exposed mostly to larger African markets in SA, Egypt, Morocco, Kenya and Nigeria. Mauritius and other countries typically have a weighting of less than 5 percent each. But the Absa Africa Financial Markets Index goes beyond market size in ranking African countries’ markets as it measures access to foreign exchange; the transparency of the market; the tax and regulatory environment; the capacity for local investors to invest; the macroeconomic opportunities; and the enforceability of financial contracts. When all these factors are taken into account, despite concerns about recent delistings, SA ranks first — it scores top on four of the six measures and is in the top three on the other two.

Nigeria ranks third, Kenya is ranked seventh, Morocco eighth and Egypt 14th. Mauritius ranks second to SA with good scores on five of the six measures. Only on access to foreign exchange does it score well below other markets.

The report notes that early this year, the Stock Exchange of Mauritius opened up its market to international central securities depositories such as Euroclear and Clearstream, allowing foreign investors who invest in debt securities, Eurobonds and exchange traded funds to transfer these securities directly via the depositories to other investors.

Mauritius is only the second market after SA measured by Absa’s index to link to these depositories.

Namibia scored the best out of all the countries measured for the capacity for its local investors to invest in its financial markets.

Also highlighted in the report: Namibian pension assets rose 9.6 percent to $ 4,582 per capita — the highest of the 23 countries — on the back of strong market performance in last year. Pension assets are double the market capitalisation of the financial markets in Namibia and almost 58 percent is invested in foreign markets, the report says. Botswana improved its position in the Financial Markets Index with more government bond auctions and improved lending facilities for listed corporate bonds. Despite the pessimistic view South Africans often take of the local economy, the country was ranked first on macroeconomic opportunities. Despite the lowest annual growth rate over the past five years and the International Monetary Fund’s prediction that it will have the weakest recovery of all the index country’s over the next two years, SA’s high living standards, a low ratio of non- performing loans to gross loans, and large export market share pushed it to top of the rankings for macroeconomic opportunities metric. The data for the index was collected by the OMFIF, using extensive quantitative research and surveys across the 23 countries of more than 30 policymakers and top executives from financial institutions, including banks, securities exchanges, central banks, regulators, audit and accounting firms and international financial and development institutions.