Afmi 2018 Final
Afmi 2018 Final
28.5167° S | 28.6167° E
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Acknowledgments11
Pillar 1:
Market depth
12-15 Pillar 5:
Examines size, liquidity Macroeconomic
and depth of markets and opportunity
diversity of products in each 28-31
market. Assesses countries’ economic
prospects using metrics
on growth, debt, export
competitiveness, banking
sector risk and availability of
macro data.
Pillar 2:
Access to foreign Pillar 6: Legality and
exchange enforceability of standard
16-19 financial markets
Assesses the ease with which master agreements
foreign investors can deploy
and repatriate capital in the 32-35
region. Tracks the commitment to
international financial market
agreements, enforcement
of netting and collateral
positions and the strength of
insolvency frameworks.
Akinwumi Adesina
President of the African
Development Bank
Aim of index Capital markets play a vital role in Africa’s future. The
continent’s financial markets have remained resilient
African economies and innovative amid slowing worldwide growth after
the synchronised upturn of 2017. However, they remain
are undergoing a fragmented and shallow compared to their equivalents in
Latin America and Asia. The second edition of the Absa
significant period Africa Financial Markets Index, produced by OMFIF, draws
attention to the considerable investment opportunities and
of transition and untapped market potential of countries across the continent.
The African Development Bank’s African Financial Markets
appraisal, with Initiative was launched in 2008 to develop local currency
bond markets. Africa’s capital markets have grown
growing foreign significantly over the past few decades, with around 30
stock exchanges in 2018 against just five in the 1980s. Total
investment local currency sovereign bond issues increased to more than
$240bn in 2017 from $28bn in 2000. This includes 94% of
interest and much Treasury bills with original maturity of less than one year in
examination of the 2000 v. around 80% in 2017. The Bank’s African Financial
Market Database expanded to 43 countries in 2015 from 22
continent’s potential in 2012.
Resilient and deeper financial markets are essential to
for mobilising local Africa’s transformation. Achieving the Bank’s ‘High 5’
objectives for accelerating Africa’s transformation (light up
resources. Now in and power, feed, integrate, industrialise and improve the
quality of life for the people of Africa) depends on financial
its second year, the markets playing a greater role in financing the real economy.
index has become a The Bank’s goal is to support 20 capital markets over the
next decade and address market development challenges,
benchmark for the including those identified in the various indicators of the six
pillars of this index. That is why the Bank engages with the
investment community public and private sectors to support market reforms, such
as policy modernisation and frameworks governing capital
and Africa generally markets. Flexibility in accessing capital markets is key to
unlocking domestic savings and attracting investment.
to gauge countries’ Africa’s transformation requires significant resources. To
achieve universal energy access by 2025, for example, policy-
performance and makers must mobilise $30bn-$55bn annually in domestic
and international capital. This calls for a shift of resource
highlight how they can mobilisation, deploying robust financial systems and capital
markets. The private sector will need to bear much of the
learn from others. load. This latest OMFIF report provides an excellent basis
for the acceleration of the delivery of the Bank’s ‘High 5’
strategy and I strongly commend its publication.
Delve into the history of countries athat have achieved Greater co-operation and collaboration between African
transformative economic growth and a common countries will be the fundamental building blocks
denominator emerges: in nearly every case they relied on for sustainable economic development, accelerating
sound financial architecture to effectively build and connect industrialisation and the achievement of inclusive
savings to investments. Africa’s potential, if it harnesses growth. The recent signing of the African Continental
the power of resilient financial architecture, is likewise,
Free Trade Agreement by most member states of
enormous.
the African Union has ushered in an era of enhanced
Policy-makers must recognise that capital markets are intraregional co-operation and was an important
as important as social and physical infrastructure. The signpost on Africa’s journey towards building the
good news is that a new generation of African leaders institutions and financial infrastructure that will attract
are embracing the long-term view, acknowledging the local and international investors.
development paradigm has changed, and prioritising the
private sector. The second edition of the Absa Africa Financial Markets
As this second Absa Africa Financial Markets Index reveals, Index comes at a time when emerging market economies
important steps are being taken to develop financial systems are under intense pressure with currencies depreciating,
that are robust and large enough to entrench resilience. Still, growth slowing and interest rates rising. The impact
Africa’s corporate bond market is markedly small, and many has been driven in part by economic developments in
countries face financial, security or humanitarian challenges, advanced economies but also local factors. The current
and an urgent need to diversity their economies. period has only highlighted the importance of strong
Without significant shifts in policy, the world is not on domestic financial markets in improving economic
track to achieve the target of less than 3% of people living resilience.
in extreme poverty by 2030. In some places, including The 2018 edition of the index takes us further into
sub-Saharan Africa, poverty could remain in double digits Africa’s financial markets than ever before. The
percentages. To create an enabling environment for job
report assesses progress and potential across six
creation and shared prosperity, Africa must develop
deep, liquid and open capital markets both domestically key areas: market depth; access to foreign exchange;
and regionally – ensuring efficient channelling of savings market transparency, tax and regulatory environment;
towards entrepreneurs and financing vital rail, road, power macroeconomic opportunity; and the legality and
and housing infrastructure. enforceability of standard financial markets master
agreements.
IFC – a sister organisation of the World Bank and member of
the World Bank Group – is the largest global development We believe the index is an important tool that can be
institution focused exclusively on the private sector in used by policy-makers and market participants to guide
developing countries. More and more of our clients in Africa their efforts in building robust financial markets that can
are demanding local currency financing. As a triple A-rated drive inclusive growth. We are proud to be relaunching
institution, we are increasingly offering local currency the index as part of the Absa Group’s commitment to
solutions and access to local capital markets so they can
contributing to pan-African growth and prosperity.
focus on growing business instead of worrying about
exchange rate volatility.
We are also committed to building capacity, and recently
welcomed our third class of fellows for the Capital Markets
Program we have developed with the Milken Institute and
the George Washington University, forming champions for
capital markets development in emerging economies. Capital
markets are not a luxury – they are a necessity.
The Absa Africa Financial Markets Index, produced by OMFIF, provides a toolkit for
countries seeking to strengthen their financial markets infrastructure. It tracks
progress on financial market developments annually across a range of countries
and indicators. This year’s edition extends coverage to three new countries –
Angola, Cameroon and Senegal – and pays special attention to policies to enhance
market growth, including financial inclusion and investor education. Kenya, Morocco
and the Seychelles have improved their scores most over the last year, particularly
in terms of openness to foreign exchange. Nigeria’s score has also strengthened,
thanks to policies augmenting market depth and enhancing the capacity of local
investors. Mauritius and Namibia, while still among the top performers, have seen
their scores deteriorate across most pillars. Improvements in market infrastructure
and regulatory frameworks could boost the performance of countries in the middle
of the index over coming years.
1 1 South Africa 93 Deep and liquid financial markets but shows weaker macroeconomic outlook
2 3 Botswana 65 Stable performance across pillars with efforts made to improve local investor base
3 5 Kenya 65 Top place for access to foreign exchange but limited product diversit
4 2 Mauritius 62 Strong regulatory and legal framework but shallow foreign exchange market
5 6 Nigeria 61 Improvements in administrative efficiency and tax incentives boost regulatory environment
6 4 Namibia 57 Strong local investor base but low liquidity in domestic market
7 7 Ghana 55 Markets benefits from regulatory reforms but have weak insolvency framework
9 12 Morocco 50 Broad improvements across all pillars, especially on local investor base
10 10 Uganda 50 Stable performance with good foreign exchange access but low local investor capacity
11 8 Rwanda 49 Discrepancies between strong official rules on transparency and reality of implementation
13 13 Ivory Coast 44 Improving reporting standards but weak foreign participation in the market
14 - Senegal 44 Regional exchange provides opportunities for growth but legal framework lags behind peers
15 11 Tanzania 43 Mining sector regulations help market deepen but local investors continue to lack capacity
16 14 Egypt 42 Improving foreign exchange environment but problems with contract enforcing
19 - Angola 34 Move to more flexible exchange rate encourages foreign investment but capital controls still in place
20 17 Ethiopia 26 Underdeveloped financial system lacking security exchange and corporate bond market
Score across all pillars, max = 100. The second edition of the index adds three new countries (Angola, Cameroon and Senegal). The scope for direct comparison
of countries’ position in the index between 2017 and 2018 is therefore limited.
Morocco
Building Africa’s
financial markets
41 40 66 65 65 21
40 66 67 14 51 26
Nigeria
Uganda 10 30 22 10 62 23
Cameroon
66 53 94 50 59 42
43 83 60 13 63 33 Kenya
Ghana Rwanda
28 62 45 29 55 30
44 43 70 33 65 83
55 58 71 13 57 74 21 35 90 14 56 77 Tanzania
Seychelles
Pillar 6:
Legality and enforceability of Angola
standard financial markets Zambia
master agreements 35 36 70 19 58 38
South Africa 100
Mauritius 94 24 75 26 49 61 32
Kenya 83
Zambia 78 29 29 52 29 57 10 Mozambique
Rwanda 77 48 77 56 14 44 78
Ghana 74
Botswana 52
Botswana
Namibia 43 Namibia
Nigeria 42 38 29 49 17 50 32
Tanzania 38
Uganda 33
Seychelles 32
Mozambique 32 48 79 78 64 69 52
Senegal 30 43 72 57 56 70 43
Cameroon 30 Mauritius
South Africa
Ivory Coast 26
Egypt 24
Ethiopia 23
Morocco 21
Angola 10
56 52 89 18 63 94
100 91 94 95 75 100
Absa Africa Financial Markets Index 2018 | 9
The report finds that:
Countries are progressing and regulatory environment’. market growth and development’,
with policies that support the according to survey respondents.
The greatest area for improvement
development of financial markets
for the continent remains the
International financial reporting
across the continent. South
‘capacity of local investors’. standards are required for domestic
Africa’s ‘twin peaks’ strategy for companies in 17 out of the 20
Excluding the top-five scorers,
improving financial regulation and countries in the index. Both Ivory
the remaining countries average a
Mozambique’s ‘financial sector Coast and Mozambique have
score of just 22 in Pillar 4. Survey
development strategy’ stand out transitioned from ‘permitted but not
respondents highlighted that the
among the frameworks introduced required’ to ‘required’ in the space of
lack of knowledge and expertise
over the past year. Such initiatives a year.
of pension fund trustees and
have boosted performance for the
other asset owners hinders the Only South Africa, Nigeria and
index as a whole.
500 100
450 90
400 80
350 70
300 60
250 50
200 40
150 30
100 20
50 10
0 0
South Africa
Seychelles
Botswana
Ivory Coast
Ethiopia
Senegal
Egypt
Tanzania
Mauritius
Nigeria
Kenya
Angola
Zambia
Rwanda
Mozambique
Uganda
Namibia
Cameroon
Morocco
Ghana
Sources: National securities exchanges, national central banks, Absa, OMFIF analysis. Note: Individual category totals (LHS)
provide average scores for the indicators within each category. For full list of indicators, see Methodology on p.38-39. The
harmonised score (RHS) is the average of all indicators across all categories, giving a total pillar score.
Absa Africa Financial Markets Index 2018 | 13
Deep and liquid capital markets are which other securities can be priced. turnover of less than 10%. Overbearing
fundamental to supporting economic According to a multilateral financial or inadequate regulation and oversight
growth, creating domestic investment institution operating in Kenya, ‘Instead of capital markets play a major role.
opportunities and attracting foreign of issuance of a few large bonds in key Regulators in one southern African
and local capital. Pillar 1 measures this maturities that could provide good country reported they ‘do not have full
by looking at market capitalisation and reference points, the primary market capacity to supervise the securities
product diversity. The average market consists of many small-sized bonds business due to shortage of staff’.
capitalisation of the 20 countries concentrated in the short end of the
Stringent, inflexible and outdated
covered by the index is just 56% of yield curve.’ Short-term treasury bills
regulation adds significantly to
GDP; even this low figure masks large account for around 40% of all local
costs. This makes it less attractive
variations between countries. currency debt in Kenya. This makes it
for companies to list. ‘Cultivating
Only three countries (South Africa, harder to build a broader market. a pipeline of new prospective
Botswana and Ghana) have a market Secondary markets are generally issuers remains a stumbling block,’
capitalisation greater than 100% fragmented and illiquid, hindering according to survey respondents in
of GDP, while in 14 countries it is transparency and price formation. This Kenya. Respondents in all countries
lower than 50%. Ethiopia lacks a is reflected in low turnover figures for highlighted this as a concern, even
securities exchange, apart from one bonds and equities. Ten countries have in relatively advanced markets like
for commodities. There are no equities total bond market turnover of less than South Africa, where local financial
listed on Angola’s exchange, and both 10%, and 15 countries have equity firms complain ‘there are very few new
Cameroon and Mozambique have a entrants’ and that the main issuers are
market capitalisation of less than 5% ‘the normal suspects’.
of GDP. South Africa is the only country
Thin secondary markets
where the total value of listed equities
is more than $100bn, at $1.1tn. This encourages buy-and-hold
strategies, hindering secondary market
Almost all countries (except Angola,
liquidity. There were no trades in
Cameroon and Ethiopia) have some
corporate bonds in Zambia, Uganda,
form of corporate bond market. These,
Rwanda, Namibia, Egypt, Cameroon
however, are typically small. Excluding
Figure 1.2: Market and Angola over the last 12 months
outstanding, listed on exchanges, $bn
Total sovereign and corporate bonds
% bonds outstanding
according to respondents.
corporate bonds by around six-to-one,
at $313bn against $54bn. While most countries have a
primary dealer system in place for
% of GDP
Figure 2.1: Volatile capital flows cost South Africa top spot
Ranking of individual categories, max=100 (LHS); harmonised score, max=100 (RHS)
400 100
350 90
80
300
70
250 60
200 50
150 40
30
100
20
50 10
0 0
Ethiopia
Seychelles
Botswana
Mauritius
Namibia
Kenya
Nigeria
Egypt
Ghana
Uganda
Senegal
Morocco
Tanzania
Rwanda
South Africa
Zambia
Ivory Coast
Angola
Cameroon
Mozambique
Sources: International Monetary Fund, national central banks, Absa, OMFIF analysis. Note: Individual category totals (LHS)
provide rankings for the exchange rate reporting standard, capital controls, interbank foreign exchange turnover and
the total portfolio investment flows to reserves. The harmonised score (RHS) represents the average of all categories’
indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39.
Absa Africa Financial Markets Index 2018 | 17
Given their relatively restricted Strategies for boosting interbank to top the list with 44%, from around
sources of domestic capital, African foreign exchange liquidity 36% last year.
financial markets are highly reliant on
South Africa’s experience highlights Foreign reserves have been steady
foreign investment. This is especially
the risks of open capital markets. in most index economies since 2012,
pronounced against a background
With the US Federal Reserve raising with some exceptions. Oil-dependent
of improving growth in advanced
interest rates, pressures on emerging Nigeria and Angola have suffered from
economies and continuing challenges
markets are high. Africa, home to many weak commodity prices over the past
across emerging markets.
commodity-exporting economies, is few years, and have drawn on foreign
Pillar 2 measures some of the factors especially exposed. Foreign exchange reserves to defend their currencies.
that determine markets’ potential liquidity as measured by the amount Between 2012-17, Angola’s reserves
attractiveness to international of foreign exchange traded in the fell by $14bn (45%), and Nigeria’s fell
investors. These range from the level interbank market is low across the by $7bn (15%). Conversely, Egypt,
of capital controls and exchange rate continent, making this one of the key Morocco and Mauritius have seen
reporting standards that define the differentiating factors for variation in strong growth in reserves.
ease with which investors can access countries’ scores in this pillar.
them, to the level of foreign exchange The case of Egypt is the most
The most active foreign exchange impressive; reserves almost tripled
liquidity that affects investors’ ability
market is in South Africa, with more between 2012-17, growing by $22bn.
to deploy and repatriate capital.
than $1.2tn annual turnover over Its reserves have reached record levels
The need to manage volatility resulting 2017, according to central bank data. in 2018, aided by a $4bn Eurobond
from openness is also addressed in the Kenya comes second with around sale in January that helped provide a
pillar, as measured by central banks’ $34bn and Ghana follows with cash cushion and by setting up the
ability to meet demand for currency $29bn, a significant increase from ‘Egypt Fund’ in July to help manage the
by looking at the ratio of net portfolio last year’s $18bn. Morocco, Nigeria country’s sovereign wealth.
flows to reserves. and Uganda also have strong levels of
turnover above $10bn. Beyond these Towards a more open environment
Kenya earns the highest marks in
countries, foreign exchange turnover is Despite the short-term risks arising
this pillar, a significant improvement
relatively low. Some states are taking from open markets, underdeveloped
from ranking sixth last year. The
steps to improve the environment foreign exchange markets can be
relaxation of capital controls boosted
for foreign exchange transactions. sources of instability and obstacles
its performance, as did improvement
In 2017, Mozambique introduced its to long-term development. Investors
of the country’s net portfolio flows to
financial sector development strategy, who participated in OMFIF’s survey
reserves ratio. South Africa has fallen
which approves the standards and consider a gradual opening of capital
to second place this year. While South
procedures for foreign exchange markets underpinned by solid market
Africa is top in the interbank foreign
transactions, and changes processes infrastructure as an important step
exchange turnover, capital controls
regarding their registration and in strengthening Africa’s financial
and official exchange rate reporting
authorisation. markets. The exchange rate regime
categories, it suffers from a fairly high
ratio of net portfolio flows to reserves. The index rewards countries with and degree of openness to the flow
Over 2017, it experienced portfolio a high level of foreign exchange of capital are crucial in shaping the
investment outflows of $16.4bn, liquidity. However, while this can foreign investment environment.
against $50.5bn of reserves held by be an important element of well- Of the 20 index economies, five have
the South African Reserve Bank. functioning and resilient markets, it a fixed regime, five an intermediate
is also important that central banks regime, and 10 have freely floating
South Africa has the highest daily
observe prudent reserve management currencies. Among those with fixed
foreign exchange turnover to annual
strategies and can cope with sudden regimes, Ivory Coast and Senegal
GDP ratio among emerging markets,
capital outflows. In response to this use the West African CFA franc, and
at 17.1%. This is significantly above
need, index countries bolstered their Cameroon uses the Central African CFA
average and around five times higher
collective reserves to $233.4bn in
than that recorded in other Brics franc, both of which are pegged to the
2017 from $192.6bn in 2012.
countries (Brazil, Russia, India and euro. The remaining two, Botswana’s
China). In the light of global trade More than half the reserves were held pula and the Namibian dollar, are fixed
tensions, a slowdown in China and by three of the continent’s largest to the South African rand as part of the
an unorthodox policy mix in the US, economies: South Africa, Nigeria and Common Monetary Area. Intermediate
being one of the most liquid emerging Egypt. However, reserves as a share regimes exhibit greater variation, from
markets has created vulnerabilities of GDP are highest in Africa’s smaller managed floats (Ethiopia), to floating
in South Africa, as was demonstrated but more developed economies. Over systems with bands (Morocco, Angola)
during this year’s emerging market 2017, this metric grew substantially in to yet other arrangements closer to
sell-off. Mauritius, which overtook Botswana flexible rates (Egypt, Rwanda).
Ethiopia
Uganda
Rwanda
Ivory Coast
Mauritius
Egypt
Nigeria
Namibia
Cameroon
Angola
Ghana
Seychelles
Botswana
Senegal
South Africa
Kenya
Morocco
Tanzania
Mozambique
800 100
700 90
80
600
70
500 60
400 50
300 40
30
200
20
100 10
0 0
Seychelles
Mauritius
Ethiopia
South Africa
Namibia
Egypt
Nigeria
Botswana
Kenya
Ghana
Uganda
Ivory Coast
Tanzania
Morocco
Senegal
Rwanda
Zambia
Angola
Cameroon
Mozambique
Sources: Bank for International Settlements, International Financial Reporting Standards, Deloitte International Accounting
Standard plus, World Bank Ease of Doing Business, Standard & Poor’s, Moody’s, Fitch, ABSA, OMFIF analysis. Note: Individual
category totals (LHS) provide rankings for financial stability regulation, tax environment, market development, minority
shareholder protection, reporting/accounting standards, financial information availability, corporate action governance
structure, existence of credit rating. The harmonised score (RHS) represents the average of all categories’ indicators, and is
used to compile the total scores for Pillars 1-6. More information on p38-39.
Absa Africa Financial Markets Index 2018 | 21
Pillar 3 addresses improvements to the survey, said the regulatory transactions lack a framework for
in Africa’s regulatory and tax environment is heading in the right exemptions. This view was reiterated
environments, which play a critical role direction, citing the use of simple by respondents in the Ugandan
in developing an attractive domestic and relatively low tax rates applied to securities market.
capital market. A handful of countries returns on some investments. They
Corporate governance, protection
in Africa have focused on regulation also noted that government bonds
of minority shareholders and quality
to bolster market development and for non-residents are not subject to
financial reporting are prerequisites
attract foreign investors. income tax. However, a respondent
for capital market development.
Nigeria and South Africa score highly from another Big Four firm highlighted
To support price discovery, timely,
in this pillar. The former has made room for improvement, saying ‘the tax
accurate and relevant data must be
changes to its tax system which, regime is good for multinationals, but
available. International credit ratings
according to the central bank, will for smaller companies with second-tier
also aid transparency.
‘broaden the tax base while improving audit firms there may be questions.
the efficiency of tax administration The tax system is reasonably Rwanda fares well in terms of
and regulation’. A large securities sophisticated, but I believe it actually transparency and regulatory
firm in Nigeria noted that ‘ongoing inhibits growth. It should encourage strength, receiving the highest score
amendments are likely to improve the more foreign investment.’ possible in the index for protection
system’. Capital market transactions of minority shareholders. However,
Uganda, which scores low on the there are discrepancies between
are exempt from withholding taxes, tax indicator, has not undertaken
while there are more than 20 tax the official rules and regulations on
significant reforms. Public sector transparency and the reality of their
treaties and agreements on double respondents noted that the current
taxation with third countries. implementation. The country also lacks
system’s structure discourages any corporate credit ratings from the
Government bonds are subject to a tax
market growth and development. main agencies, and scores relatively
holiday on income earned.
The withholding tax on government low for tax environment. Mauritius
A senior figure in a Big Four securities is 20%, against a regional has 27 corporate ratings but only one
accountancy firm in Ghana, responding average of 15%, and capital market sovereign rating.
Ensuring regulatory consistency
Figure 3.2: Only 10 index countries have corporate ratings
The number of corporates rated by S&P, Moody’s and Fitch. Unlisted countries scored zero. In South Africa there is the perceived
risk of ‘fragmentation’ of trading on
0 the Johannesburg Stock Exchange
Morocco 7 due to the introduction of four new
1 3
Egypt domestic exchanges since 2016. The
1 0 country is, however, in the closing
stages of implementing a ‘twin peaks’
regulatory framework to strengthen
capital markets and aid their
1 development. This model separates
regulatory functions between a
1 16 1 Nigeria
Ghana 0 regulator that performs prudential
1 4 supervision and one that performs
Kenya market conduct supervision.
1 0
Angola Instead of having a separate regulator
0 1 for banks, South Africa’s new structure
0 creates two ‘peaks’, ‘prudential
1 regulation’ and ‘good conduct’. The
Namibia 1 0 0 Botswana Mauritius legislation is bolstered by the launch of
the Financial Sector Conduct Authority,
5 0 15 which has a broader scope than its
precursor, the Financial Services Board.
10 6
6 As one senior South African regulator
South Africa 33
Figure 4.1: South Africa, Nigeria and Morocco have dominant pension/insurance funds
relative to market size
Ranking of individual categories, max = 200; harmonised score, max = 100 (RHS)
200 100
180 90
160 80
140 70
120 60
100 50
80 40
60 30
40 20
20 10
0 0
Cameroon
Namibia
Zambia
Ivory Coast
Rwanda
Uganda
Ethiopia
Mauritius
Nigeria
Angola
Egypt
Botswana
Ghana
Tanzania
Morocco
Senegal
Mozambique
South Africa
Seychelles
Kenya
Pension and insurance assets to domestically listed assets, weighted by asset liquidity
Pension fund assets under management per capita
Pillar 4 Harmonised score (RHS)
Sources: African Development Bank, Organisation for Economic Co-operation and Development, national stock exchanges,
Thomson Reuters. Note: Individual category totals (LHS) provide rankings for pension and insurance assets as a ratio of
domestically listed assets weighted by liquidity, and pension fund assets under management per capita. The harmonised
score (RHS) represents the average of all categories’ indicators, and is used to compile the total scores for Pillars 1-6.
More information on p.38-39.
Absa Africa Financial Markets Index 2018 | 25
Domestic institutional investors results in small and relatively inactive Restrictions on the type of assets
across Africa, particularly pension local exchanges. investors can access are prevalent,
funds, are an important part of the with many funds able to invest only
The size of South African pension fund
financial landscape. Better design, in simple products. Lack of expertise
assets per capita, at $5,411, makes
implementation and regulation of of more complex asset classes and
the country an outlier in this sample.
savings institutions has increased strategies among pension fund
Its ratio of total pension and insurance
population coverage and created new trustees and other local investors is
AUM to domestically listed assets is
vehicles for citizens to access capital one factor impeding the growth of
39%. As South Africa’s market is highly
markets. Policies to bolster financial financial markets and new financial
liquid, with equity market turnover of
inclusion have increased the size of products. Survey respondents in
40% and corporate bond turnover of
assets held by local investors, creating Tanzania, Uganda and other countries
106%, it achieves the maximum score
opportunities to develop financial indicated this results in ‘a tendency
of 100 in the index.
products and enhance liquidity. to stick to asset classes that are
Namibia ranks second in Pillar 4, with familiar such as government bonds and
Educational strategies and the
a score of 71. The value of pension equities’.
introduction of mobile money
assets in Namibia was $13.4bn in 2016
infrastructures, as well as improved Expertise of asset owners and
(latest available data). This is lower
pension and investment regulations trustees
than the index average of $20bn, but
over the last decade, have boosted
is high in per capita terms, at $4,135 Respondents in around half the
the assets of domestic institutional
against an average of $974 for the countries in the index emphasised
investors. However, weak commodity
countries tracked in the index. that lack of in-depth expertise
prices and currency depreciations
against a rising dollar have reversed Asset liquidity is an important among pension fund trustees and
this trend somewhat. The value of determinant for scores in Pillar 4. other asset owners as an obstacle to
assets held by pension funds in the Botswana, Namibia and the Seychelles market development. Respondents
20 countries covered by this index all have large domestic institutional in several countries, including
fell by 22% to $401bn in 2016 (the investors relative to domestic listed Botswana and Namibia, said that
latest available data) from $512bn in assets. In addition, there is low despite local investors not having the
2015. This underscores the need for liquidity in the domestic market as necessary knowledge, the existence
multicurrency products to enable risk assets are held by long-term buy- of international investment advisory
diversification. and-hold investors, which has lowered services mitigated this to an extent.
Pension funds must allocate a large these countries’ overall pillar score. However, all respondents in these
proportion of their portfolios towards countries said a lack of expertise
Access to varied products hindered the development of new
the domestic market. In conjunction
with capital restrictions mentioned in Several countries in the index require financial products, by reducing their
Pillar 2, index countries as a whole are local investors to invest a large willingness or ability to invest in more
limited in their diversification strategy. portion of their assets in the domestic complex and ‘adventurous’ assets
market. As discussed in Pillar 1, and strategies while pursuing stable
The scores in Pillar 4 track the capacity returns. This includes Botswana,
Namibian investors are required to
of local institutional investors (pension Ivory Coast, Ethiopia, Ghana, Kenya,
and insurance companies) according invest at least 45% of their assets
in domestic securities. Similarly, Namibia, Senegal and South Africa.
to their per capita assets under
management and the size of their AUM Ugandan investors must allocate most Although South Africa has a
against the total value of domestic of their investments domestically sophisticated capital market,
financial market assets, weighted by or in the region. Given the ‘high risk respondents in the country
liquidity. and poor returns’ associated with emphasised that knowledge and
domestic assets, according to one local expertise is ‘limited to a few very
Low local capacity hinders market regulator, fund performance suffers. large players only’. This results
liquidity and growth in most investors ‘sticking to the
Several countries have relaxed these
vanilla strategies’. Respondents from
Local investor capacity in many African requirements. In April 2018, the
Botswana said the lack of knowledge
countries is low, with pension funds, offshore allocation limits for South
creates ‘a risk-averse mindset among
insurance firms and other investors African funds increased to 30% from
trustees and others towards the more
lacking sizeable AUM. In Ivory Coast, 25% and the allocation to African
complex instruments’.
Egypt, Ethiopia, Ghana, Mauritius, investments outside South Africa
Zambia and Senegal, the ratio of to 10% from 5%. This means that In Nigeria, Tanzania and Namibia,
institutional AUM to domestically listed investors may allocate up to 40% of respondents highlighted the
assets is below 20%. This contributes assets outside South Africa, potentially presence of some ‘highly qualified
to low demand for new products and boosting returns. and experienced people’ working
capitalisation, $bn
capital market activities are not
literacy. Widening the scope of
attractive. As a result, according to
Pension and
outstanding
Total bonds
and market
assets, $bn
banking services to capture as many
insurance
one Tanzanian securities company,
individuals and small and medium-
‘most small businesses do not
sized enterprises as possible, especially
consider the capital market as a useful South Africa 517.2 1,309.6
women and the rural population, is
way to raise sufficient capital’. Morocco 48.1 63.2
critical to improving financial inclusion.
Botswana 26.0 40.0
Respondents in many countries Better financial education will direct Nigeria 25.2 61.3
also highlighted regulatory issues greater savings towards a country’s Kenya 14.2 36.7
as inhibitors of market growth. One capital market, supporting market Namibia 13.4 5.1
official from a Zambian banking development. Egypt 13.1 89.9
association said ‘even regulators Tanzania 4.5 14.0
‘A vast majority of the adult population Angola 2.5 7.5
are ill-equipped to understand the
in Nigeria has little or no knowledge Ghana 2.4 96.0
complexity of financial markets’, so Uganda 2.3 9.8
of financial market products and
they are unable to encourage market Ivory Coast 1.9 15.8
capital markets in general,’ said a
development and, in many cases, Cameroon 1.6 0.7
representative of the country’s over-
implement harmful rules. Indeed, Senegal 1.2 15.8
the-counter securities exchange. Rwanda 1.1 3.7
Nigerian pension funds are generally
Zambia 1.0 11.7
barred from diversifying into novel South Africa’s newly-created Financial
Ethiopia 0.7 -
products, and there is a limit of Sector Conduct Authority was Mozambique 0.6 1.2
25% for equities and unsecured established to supervise financial Mauritius 0.6 11.3
instruments, according to the central markets and promote financial Seychelles 0.3 0.3
bank. One large securities firm said education. Its consumer education Sources: African Development Bank,
‘regulation discourages investments department holds workshops on Organisation for Economic Co-operation and
Development, national securities exchanges,
in complex asset classes, which are financial literacy and investor OMFIF analysis
800 100
700 90
80
600
70
500 60
400 50
300 40
30
200
20
100 10
0 0
Seychelles
Mauritius
South Africa
Ethiopia
Botswana
Kenya
Namibia
Nigeria
Egypt
Morocco
Ghana
Senegal
Rwanda
Zambia
Uganda
Tanzania
Angola
Ivory Coast
Cameroon
Mozambique
Sources: International Monetary Fund, World Bank, national central banks, national finance ministries, African Development
Bank, Absa, OMFIF analysis. Note: Individual category totals (LHS) provide rankings for GDP growth, growth and export
market share, debt profile, MPC outcomes transparency, living standards, quality of banks, macro data standards and
budget release. The harmonised score (RHS) represents the average of all categories’ indicators and is used to compile the
total scores for Pillars 1-6. More information on p.38-39.
Absa Africa Financial Markets Index 2018 | 29
Growth across African economies The country must also improve its poor financial reporting push Zambia
rebounded to 3.7% in 2017 following export competitiveness – Egypt’s to the bottom of the index. ‘This
a slump to 2.2% the previous year, export market share has fallen by requires a big-picture fix. Zambia
based on data from the International more than 56% over the last five needs to stabilise both politically and
Monetary Fund. However, growth years. economically to encourage foreign
prospects across the region remain investment and lower interest rates,’
With a weak macroeconomic
uneven. according to one large financial
environment, South Africa faces rising
advisory firm in the country.
Pillar 5 evaluates economic financial risks. The country slipped
performance (GDP growth, into recession in 2018 for the first Promoting inclusive growth amid
living standards and export time since 2009 after two consecutive high levels of inequality
competitiveness), financial risks (non- quarters of economic contraction Ensuring that growth is inclusive and
performing loans and external debt earlier this year. When Standard & sustainable is a persistent challenge
ratios) and financial transparency Poor’s downgraded the country’s debt for the region. South Africa enjoys
(demonstrated by availability of data, in late 2017, the rating agency cited one of the highest per capita incomes
open monetary policy communication a growing budget deficit and rising among countries in the index, but it
and the timely release of state government debt as contributing also has the highest level of inequality,
budgets). factors. However, compared to other according to the World Bank.
countries, South Africa’s financial risks
Egypt’s moderate growth, low Egypt’s economic recovery
remain low. Its external debt to GDP
financial risk and clear financial demonstrates the impact of reforms
ratio is 46%, against an average of
reporting boost its score, making it implemented since 2016 following a
more than 51% for index countries. Its
the most improved country for Pillar period of political uncertainty. Earlier
non-performing loan ratio, at 2.8%, is
5. From 12th in last year’s ranking this year, the country received a credit
far below the 10.1% average. It also
among 17 African economies, it is rating upgrade from Standard & Poor’s,
scores highly for transparency.
now second (after South Africa) out of moving to B from B minus. It also
20 countries. Egypt’s GDP per capita Mozambique’s poor score is driven earned a credit outlook boost from
remains modest, requiring more effort by mounting debt and low living Moody’s Investor Service, rising from
to ensure growth is spread out evenly. standards, while weak exports and stable to positive.
Ethiopia has been one of the world’s
fastest growing economies over
the last 10 years. Growth is likely to
Ethiopia andEthiopia
Figure 5.2: Ivory Coast sustained
and Ivory economic
Coast sustained growth,growth,
economic but slowdown expected
decelerate this year, but is expected to
but slowdown expected stay above 6% over the next five years.
Compound annual
Compound annual growth growth rate,
rate, five-year five-year
average and forecastaverage
% and forecast %
One tool to spur growth is
infrastructure. Underdeveloped
14
infrastructure limits productivity,
trade and overall mobility. The African
12
Development Bank estimates that the
10 continent’s infrastructure needs are as
much $170bn per year up to 2025.
8
Insulating export-dependent
countries against external shocks
6
The region’s five largest economies
4 – Nigeria, South Africa, Egypt, Angola
and Morocco – also have the largest
2
export market shares. However, all of
0 these countries, except for Morocco,
have lost ground over the last five
Senegal
Morocco
Tanzania
Rwanda
Angola
Ivory Coast
Mozambique
Mauritius
Ghana
Botswana
Egypt
Kenya
Seychelles
Namibia
Ethiopia
Uganda
Zambia
Nigeria
South Africa
Cameroon
Senegal
Botswana
Mozambique
Tanzania
Rwanda
Ghana
Ivory Coast
Mauritius
Seychelles
South Africa
Nigeria
Egypt
Zambia
Kenya
Cameroon
Ethiopia
Namibia
Uganda
31.6295° N | 7.9811° W
32 | Absa Africa Financial Markets Index 2018
Strengthening legal frameworks to build confidence
Expanding a market requires demonstrating its maturity through the enforceability of
financial agreements, clarity on property rights and compatibility with international
standards.
Figure 6.1: Most countries still need stronger legal and contractual tools
Ranking of individual categories, max=400; harmonised score, max=100 (RHS)
400 100
350 90
80
300
70
250 60
200 50
150 40
30
100
20
50 10
0 0
Ethiopia
Seychelles
Mozambique
Mauritius
Namibia
Kenya
Egypt
Nigeria
Ghana
Tanzania
Senegal
Morocco
Rwanda
Botswana
South Africa
Uganda
Zambia
Ivory Coast
Angola
Cameroon
Sources: World Bank Ease of Doing Business, Absa, OMFIF analysis. The harmonised score (RHS) represents the average of
all categories’ indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39.
Absa Africa Financial Markets Index 2018 | 33
Rapid growth in African markets can
provide attractive opportunities to
Agreement and the Global Master
Securities Lending Agreement are
‘Effective
international investors, but volatile each considered in this index. These insolvency
political and regulatory environments agreements were standardised by processes reduce
often discourage new players from international financial associations to
entering. To mitigate risk, strong legal reduce credit and legal risk and provide the likelihood of a
and enforcement frameworks that assurance on property rights. This business failure,
support financial agreements are makes global exchanges and over-the-
counter trading more efficient.
especially for
necessary. The most established African
markets already have such regulations The ISDA master agreement governs
smaller companies
in place, while smaller economies OTC derivatives transactions and is that may be viable
looking to expand are in the process of
establishing and improving them. Pillar
the most widely recognised financial in the long-term
agreement among countries in the
6 assesses the enforceability of financial index. The GMRA and the GMSLA are but encounter
agreements around Africa and their less common. The former was drawn temporary financial
compatability with global standards. up for repurchase agreements, while
the latter was drafted for securities
difficulty.’
Importance of standard agreements for
investor protection lending arrangements. These
agreements standardise definitions More than half the countries in the
Adherence to standard international and contractual terms, reducing the index use ISDA master agreements, but
master agreements signals that likelihood of disputes and providing only South Africa, Nigeria and Namibia
financial markets are mature enough guidance for resolution when also employ GMRA and GSLA. Mauritius
to implement global standards. The necessary. For investors, standard uses GMRA more widely than GMSLA,
Master Agreement of the International agreements add a degree of protection marginally reducing its score on Pillar 6,
Swaps and Derivatives Association, and can reduce the costliness of where it ranks second. In countries, such
the Global Master Repurchase entering a new market. as Rwanda, where standard agreements
are not commonly used, banks may
be using their own non-standard
Figure 6.2: Key financial masters agreements agreements. In most cases, such
ISDA GMRA GMSLA agreements have proved inadequate
when tested in default scenarios.
South Africa Well recognised Well recognised Well recognised
Nigeria Well recognised Well recognised Well recognised Building adequate insolvency regimes
Namibia Well recognised Well recognised Well recognised
Another feature that could minimise
Mauritius Well recognised Well recognised Limited use
uncertainty in relatively unknown
Zambia Well recognised Limited use -
financial markets is the presence of
Uganda Well recognised Limited use -
adequate insolvency frameworks.
Tanzania Well recognised Limited use -
Effective insolvency processes reduce
Kenya Well recognised Limited use -
Ghana Well recognised Limited use -
the likelihood of a business failure,
Botswana Well recognised Limited use - especially for smaller companies
Seychelles Limited use - - that may be viable in the long-term
Senegal Limited use - - but encounter temporary financial
Mozambique Limited use - - difficulty. A good insolvency regime
Cameroon Limited use - - should support struggling firms
Rwanda - - - without encouraging excessively risky
Morocco - - - behaviour, protect contracting parties
Ivory Coast - - - and prevent systemic risk.
Ethiopia - - -
The World Bank evaluates countries’
Egypt - - -
insolvency regimes based on the cost
Angola - - -
and speed of insolvency proceedings
Sources: Absa, OMFIF analysis. Note: Own non-standard masters agreement used assumed when there is strictly for domestic entities, along with
insufficient recognition of the standard agreement perceived.
quality of judicial processes for
a, 12
Botsw
Gha
Afric
Nig
an
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a, 4
eri
h
4
Sout
M
2
a, 5
,1
or
da
oc
an
co
Na
Rw
,6
mi
bia
,6
0.5
Uga s, 1
nda ritiu
,6 Mau
Zambia, 6
Seychelles, 10
,7
Ethiopia
Mo
zam
,8 biq
ypt ue,
Eg 10
,9
Ca
st
m
oa
er
yC
oo
Sen
or
n,
Tanzania, 9
Iv
ya,
9
ega
Ken
l, 9
Angola Ghana
+ Increasing exchange rate flexibility + Implementation of Basel III, simple and
- Weak insolvency framework, restrictive low tax levels
capital controls, high non-performing - Weak insolvency framework and low
Cameroon Kenya
+ High currency reserves in relation to + Relaxed capital controls, active foreign
slow adoption of financial stability low pension assets per capita, declining
regulations export market share
Egypt Mauritius
+ Efforts to liberalise markets with + Strong legal and regulatory framework
floating currency and gradual lifting of - High portfolio flows to reserves ratio
capital controls suggesting vulnerability to external
- Weak legal framework with no shocks, high debt levels
enforcement of ISDA, GMRA or GMSLA
agreements
Ethiopia Morocco
+ Rapid economic growth, moved to a + Large pension and insurance funds
Mozambique Seychelles
+ Improving financial and macro reporting + Low foreign exchange restrictions, high
standards, good economic growth standard of living, improving insolvency
forecast framework
- Low pension assets per capita, low - No sovereign bond market, unattractive
standard of living and high external debt regulatory environment, high debt-to-GDP
ratio
Nigeria Tanzania
+ Robust bond market activity, low debt + Improving tax and regulatory
burden and strong legal and enforcement environment, promising growth prospects
frameworks for financial agreements - Restrictive capital controls, inactive
- Gaps in exchange rate reporting, secondary market, low pension and
dependence on oil heightens exchange insurance assets
reserves volatility
Rwanda Uganda
+ High transparency and strong + Good data availability and transparency
insolvency framework - Low turnover of equities and bonds,
- No corporate credit ratings, weak high tax on government securities
export activity and high degree of capital
controls
Senegal Zambia
+ Above-average GDP growth and + Diverse products and relatively strong
Competitiveness
Pillar 3: Market transparency, • Absolute export market share and growth in export
tax and regulatory environment market share (excluding oil) over past five years
Methodology
Pillars and indicators throughout Africa. Participants include chief executives,
The index scores each country based on six pillars: managing directors, managing partners or country
market depth; access to foreign exchange; market experts across a range of global, regional and local
transparency, tax and regulatory environment; capacity institutions, including banks, securities exchanges,
of local investors; underlying macro opportunity; and the regulators, asset managers and investors.
legality and enforceability of standard master financial
agreements. Pillars are built from a set of key indicators Harmonisation and scoring
listed on p.38-39. Raw data are harmonised on a scale of 10-100 to allow
Each individual indicator is weighted equally in each comparability between indicators.
pillar, and each pillar is weighted equally in the overall Outliers in the raw data falling above or below two
index score. standard deviations of the mean are accounted for
The second edition of the index adds three new during the scoring. In the case of an outlier greater than
countries (Angola, Cameroon and Senegal). The scope the upper bound, its value is replaced by the next-
for direct comparison of countries’ position in the index highest data point in the sample. This means
between 2017 and 2018 is therefore limited. indicators can have more than one country scoring
maximum points.
Data and survey In the rare case of missing data, data points are
The data informing the scores for each pillar and their modelled to smooth gaps and ensure the overall pillar
indicators stem from a mixture of quantitative and score is not affected. The proxy value takes the average
qualitative analysis. The quantitative data collected of the remaining harmonised scores for the country
are of the latest year available. For full year statistics across all its indicators in the pillar, ensuring the final
( i.e. GDP) this is 2017 data. For statistics covering the pillar score is not skewed by a missing value.
previous 12 months (i.e. securities market turnover) this The scoring of each indicator and pillar works under the
is July 2017 to July 2018. In cases where the data refer to same process. Once indicators have a harmonised score,
current conditions, such as for the Basel implementation the average is taken across each indicator in a pillar to
stages, international accounting standards, and credit create the overall pillar score. Similarly pillar scores are
ratings, the data are as of mid-August 2018. averaged to create the country’s composite score.
The survey element provides both quantitative and
qualitative data relating to legal, regulatory and market How to get full marks
conditions in each of the countries, such as information
As the index is a comparison of a country’s financial
on tax environment, as well as responses based on
market against the selected sample, a country can
country experiences.
reach the maximum score of 100. In such a scenario, the
The survey was conducted between June and August country must achieve the maximum score of 100 in all
2018, covering more than 50 institutions operating six pillars.