An analysis
With Africa’s population expected to exceed China’s by 2025, the continent’s economic potential is indisputable. And the rest of the world has taken notice.
Between 2010 and 2016 more than 320 embassies were opened in Africa, and global investment is beginning to pour in. A diligent approach can ensure that these external opportunities are converted but this is only half the challenge. If Africa truly wants to become an economic powerhouse, it should get serious about reforming its financial markets.
A broad, all-inclusive financial market that makes it easy for investors will enable Africa to grow. Commendable progress is being made. The recent ratification of the African continental free trade agreement promises to create a single market with a combined GDP of $2.5-trillion and access to 1.2-billion people.
But more needs to be done by individual countries in Africa to reform and liberalise their financial markets. This will be the key to fostering financial inclusion, economic development and capital raising.
Some countries — such as Botswana, Kenya, Nigeria and SA — have made steady progress towards reforming their financial markets. SA was the top-ranked nation in the 2017 and 2018 editions of Absa’s Africa financial markets index. While the index’s results highlight the progress and commitment of Africa to reforms in the financial markets, there is still work to be done. Countries such as Ethiopia and Mozambique lag behind, particularly in the development of stock exchanges, which are essential to capital raising through listings.
Ethiopia lacks a securities exchange and no equities are listed on Angola’s exchange. Both Cameroon and Mozambique have a market capitalisation of less than 5% of GDP. SA is the only country in which the total value of listed equities is more than $100bn, at $1.1-trillion. Only SA, Botswana and Ghana have a market capitalisation greater than 100% of GDP, and it is lower than 50% in 14 other countries.
Accelerated reforms in Africa’s financial markets are needed, principally because they can help tackle the significant funding needs of the continent, particularly for infrastructure projects. Such reforms can also serve as a catalyst for capital markets being positioned as platforms for efficient mobilisation of much-needed funding to support growth of small and medium-scale sectors, in a risk-reduced environment.
Africa’s transformation requires significant resources. For example, to achieve universal energy access by 2025 there is a need to raise up to $55bn annually in domestic and international capital, while as much as $50bn is needed to fund other infrastructure projects across the continent.
While some African countries are implementing policies to bolster regional stock market integration and encourage expansion, they are still hamstrung. Low liquidity, lack of product diversity, excessive controls and administrative procedures in the foreign exchange markets, as well as limited prospects for new listings, are all significant obstacles to capital market integration and growth.
Nevertheless, it is not all doom and gloom. For example, several countries have made progress recently in migrating to market-determined foreign exchange regimes, implementing local content policies and creating more transparent and well-regulated capital markets, which have been supported by an improving tax environment. This is vital for attracting foreign investment, encouraging domestic participation and aiding the development of the local capital markets.
Equally impressive is the increased financial inclusion through better design, implementation and regulation of savings institutions. This has widened opportunities for people in these countries to access capital markets. Progress has also been made through policies that have increased the size of assets held by local investors, creating opportunities to develop financial products and enhance market liquidity.
To accelerate financial market reforms, African countries should prioritise policy initiatives that make it easy for investors to participate in the markets. For example, African countries need to pay more attention to the trading and settlement infrastructure to spur liquidity, while ensuring timeliness and transparency of market data. This will improve the competitiveness of Africa’s capital markets and better position Africa to attract its fair share of available global capital.
The fruits of opening up financial markets are undoubted. It is the main reason GDP per head south of the Sahara is two-fifths higher than it was in 2000. And while much of the world retreats into protectionism, it is heartening to see Africa attempt to open up its markets. This approach must continue, starting with ambitious financial market structural reforms.
The continent has the power to transform not only its economic future but also the lives of millions by leveraging on the power of the financial markets. It is an opportunity Africa cannot afford to miss.
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