Public and private sectors must come together to build depth

Anthony Kirui, Head of Global of Markets, Absa Regional Operations, for Absa Corporate and Investment Bank, shares his views on what Africa should do to create more resilience in these turbulent times.

Successive global crises have highlighted the need for Africa to build resilience and selfsufficiency and shown that strategic partnerships are key to managing economic headwinds. The pandemic, as is now well known, took its toll on Africa, as in other regions. Many governments, already vulnerable before the pandemic began, extended themselves further to deal with the crisis. This is highlighted by high debt-to-GDP ratios in countries such as Ghana and Zambia and widening fiscal deficits.

As countries were finding their way out of this crisis, another struck, precipitated by the Russia-Ukraine war.

The impact of this faraway conflict has been considerable, driving high inflation, resulting in food shortages in a continent that is a net food importer, and leading to high interest rates in developed countries, all of which are stifling post-pandemic growth prospects and stabilisation efforts.

Government finances have been strained by unexpected demands on revenue such as subsidies to support the man in the street against hardship.

These crises have also highlighted Africa’s continuing dependence on external sources for not just food, fertilizer and other products, but also capital.

The economic pressures are significant. The continued rise in interest rates in developed markets raises the risk of inflationary pressure on currencies and may drive capital flight from Africa.

But this also provides African countries with an opportunity to deepen their domestic markets, which will not only act as a buffer against exogenous shocks but also help to build a saving and investment culture that will support economies.

While governments may not have the capacity to drive this process, the private sector stands ready to leverage its expertise in raising finance and developing and managing local assets.

During Covid-19, commercial banks in Africa collaborated with regulators to restructure loans and facilities to help clients and customers across the continent to get back on their feet. The challenge now is to manage volatility in exchange and interest rates.

The pandemic showed what could be achieved if all stakeholders pull together, motivated by a mutual need. The collaboration between regulators and financial institutions at that time has strengthened these relationships and provided a reference point to navigate other crises.

The creation of local debt markets will help to mobilise domestic capital and reduce a dependence on expensive external funds. Investing locally builds resilience and has the added benefit that it is generated and spent at home, supporting local pension funds and other assets under management.

Creating fluid and efficient over the counter (OTC) markets provides liquidity and enables governments borrowing on domestic markets and gives market participants the ability to enter and exit with confidence.

Where markets are efficient and there is clear price discovery and the opportunity to easily enter and exit, investors will take notice.

Absa is well positioned to assist in the process on the back of expertise and knowledge built up on the back of the Absa Financial Markets Index, now in its fifth year.

The Index measures six pillars: market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macro-economic opportunity and enforceability of financial contracts.

Last year 23 African markets were included and in 2022, this has risen to 26.

This is a useful tool for countries in Africa to benchmark themselves and it allows regulators to see what their counterparts are doing in other countries. Through it, they can access best practice and learnings they can use to develop their own markets.

Overall, the Index is playing a significant role in helping to drive domestic market reforms. A development such as in Botswana, where the retirement benefits authority is considering a int the amount of investable assets pension funds are allowed to invest off shore which will see a larger allocation given to domestic assets. Currently pension funds are allowed to externalise 70% of their AUM. This will be one to watch in the role it plays in driving Market depth measured in Pillar 1 of he AFMI report and improving the capacity of local investors in Pillar 4.

While Uganda, Kenya and Ghana are among countries that have created frameworks that support investor confidence with growing adoption of and use of Financial Markets master agreements and ongoing efforts to improve trading in both primary and secondary markets. Uganda and Ghana have also made considerable progress around netting enforcement including passing supporting legislation. Though there is still someway to go these developments present positive progress towards deeper financial markets on the continent.

As we navigate our way out of another crisis as a continent, it is time for the public and private sectors to come together once more to see how we together build capacity and depth in local capital markets as a steppingstone to a more resilient future.