As Africa’s grows, there is the need for countries to have insights and tools to improve the state of their financial markets.
Financial markets is a broad term describing any marketplace where trading of securities including equities, bonds, currencies and derivatives occurs. The Central Bank of Kenya’s role is the financial market is to implement monetary policy decisions, manage the country’s foreign exchange reserves and manage the government’s domestic debt.
The Africa Financial Markets Index curated by Barclays Africa and the Official Monetary and Financial Institutions Forum (OMFIF) measures six pillars of financial markets. These are market depth, access to foreign exchange, tax and regulatory environment and market transparency, capacity of local investors, macroeconomic opportunity, and enforceability of financial contracts, collateral positions and insolvency frameworks. The index evaluates financial market development in 17 African countries, as well as highlighting economies with clearest growth prospects.
The index states that South Africa has the highest index rate for market depth. This is despite a general increase in active market participants and the size of financial assets relative to GDP across the continent even though access to deep markets remains a challenge for investors and companies. South Africa reflects its highly developed market infrastructure and deep connections with other countries in the region. It’s role as an intermediary for financial market participants from countries outside Africa to access the continent is also a factor leading to its highest market depth index.
The index emphasises on the importance of increasing small and medium-sized enterprises’ access to financial markets, including through dedicated market segments, as a vital means of deepening markets.
Currencies and foreign exchange rates impact global business. For African countries, when foreign investors have the ability to deploy capital relatively easy and repatriate it when required, within acceptable time limits and in appropriate amounts it represents a well-functioning financial market. For open economies, when this openness to foreign financial flows, it may coincide with risks.
Many investors believe the economics and business environment are rather exotic in Africa though this is changing. So we need governance requirements, reporting standards and trading rules in line with international norms. There is no room for African exceptions and investors do not accept this.
Robust financial market infrastructure is of vital importance for attracting foreign investors and incentivising greater domestic investor participation. This requires a strong regulatory and operational environment, high quality reporting and accounting standards, and the availability of relevant financial information published regularly.
What is then needed is a friendly tax environment which at the minimum, does not penalise financial market transactions and which, at best, aims to encourage them via incentives and other fiscal measures.
When a country lacks liquid assets, this holds back domestic investors. Local investors have a crucial role to play in building a country’s financial market. The index measures Kenya’s strength as regulatory bank capital ratios, high reporting and accounting standards, active bond market and foreign exchange liquidity. Areas for improvement in the country include low historical growth in export market share, low GDP per capita, relatively small market capitalisation.
African countries with diversified economic structures and strong domestic demand have coped better with commodity price fluctuations. There is a high premium on sound macroeconomic management propelling sustainable growth.
Growth prospects are not in all 17 countries researched on by Barclays. Past experience highlights that a supportive macroeconomic framework, with sustainable monetary and fiscal policies is highly conducive to encouraging investment and providing resilience in the face of uncertain external conditions. To encourage macroeconomies in African countries, governments need to have sound policies, allow export competitiveness, reduce exposure to financial risks and provide financial transparency.
The ease of doing business in African countries is not all good in most African countries. It takes a lot of time, cost, and the outcome of insolvency proceedings for domestic companies can be wanting in some countries. The strength of a countries legal framework for liquidation and re-organising proceedings are important to ensure a stable financial market.
According to the Barclays Bank index, South Africa and Rwanda score the highest in this indicator, due to the ability of creditors to recover large parts of their investment in the case of insolvency. They also have rules to discourage lenders from issuing high-risk loans and managers and shareholders from taking imprudent loans or otherwise pursuing harmful financial practices. We should note that most countries need to improve their adherence to international standards of financial agreements.