Strengthening capital markets will improve resilience to shocks

African capital markets need to be strengthened to improve the resilience of the continent to exogenous shocks, speakers said at this week’s event in Dakar, Innovative Financing in Capital Markets for Recovery in Africa

In order to strengthen these markets, innovative tools are needed, panellists said. Despite the disruptions caused to economies by the Covid-19 pandemic, it is clear that financial markets remain a focus for Africa.

Although individual countries have needed debt restructuring, Africa has not had to weather a full-scale financial crisis.

The performance of African stock markets was examined by Jeff Gable, the head of Macro and Fixed Income Research at South African banking Group Absa and Kat Usita, Managiwillng Director of independent think tank, the Official Monetary and Financial Institutions Forum based in London. 

They presented the findings of the 2021 Absa Africa Financial Markets Index, which analysed developments in 23 African markets. 

The main findings were:

• Africa is paying more attention than ever to adapting market standards to meet the needs of international investors seeking to diversify risks. 
• Deepening local financial markets is now universally seen as an optimal means of hedging against international economic fluctuations.
• African countries are embracing sustainable finance, incorporating international investment norms and in some cases adopting pioneering methods. 

According to the report, as the global economy struggles to recover from the worst health crisis in a century, African economies face the twin challenges of reinvigorating financial markets while strengthening market infrastructure.

The pandemic has reinforced the importance of deepening domestic markets to hedge against foreign capital outflows and help the region achieve its full potential.  

Malawi, Egypt and Uganda are among the countries that improved their ranking the most on the Index, which 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. 

Advancements in establishing the enforceability of global contractual frameworks lifted Malawi’s and Uganda’s scores while reforms in Egypt continued to boost its macroeconomic prospects.

While challenging market conditions affected country scores, most drops were attributed to methodological changes adopted to better reflect country performance and evolving trends in financial markets, the report said. 

As part of its aim to encourage progress, this year’s index, the fifth in the series, introduces new indicators that acknowledge the role of sustainable finance in expanding capital markets and achieving broader socio-economic goals. The introduction of sustainability-focused indicators weighs down scores, especially for countries at a much earlier stage of market development. However, the new measures serve as targets for countries to work towards.

Other speakers at the session were Amadou Hott, Minister in Charge of Economy, Planning and International Cooperation, Senegal; Edoh Kossi Amenounve, President of the African Securities Exchanges Association; Babacar Gning, Executive Director at Fonds Souverain d’Investissements Stratégiques; Yeo Dossina, Head of Economic Policy and Research, AUC; Pape Ndiaye, CEO, AFIG Funds; Patric Oromo Ndzana, Economist, African Union Commission; and Grace Obat, Director PSDFD at the ECA.