Absa African Financial Market index shows improvement despite challenges

While challenging conditions weighed on financial markets across the globe in 2022, developments in African financial markets have improved, according to Absa’s African Financial Markets Index for 2022. 

The index — which evaluates countries’ financial development based on measures of market accessibility, openness and transparency — showed that 19 out of 26 countries improved their scores relative to 2021, largely due to broad-based progress in developing sustainable financial markets, which is becoming increasingly important to global investors.

Scores are determined by the relative performance of each country across six key pillars: market depth; access to foreign exchange; market transparency, tax and regulatory environment; capacity of local investors; macroeconomic environment and transparency; and legal standards and enforceability.

“Those improvements are not by chance, but rather reflect a continued focus by countries to foster a financial market ecosystem that is better placed to meet Africa’s financing needs,” said Absa CEO Arrie Rautenbach.

The index continued to evolve in 2022, with coverage expanding to 26 countries, adding the Democratic Republic of Congo, Madagascar and Zimbabwe.

Now in its sixth year, the index is aimed at showing how economies can reduce the barriers to investment, which can, in turn, boost sustainable growth. 

“The 2022 index, with strengthened geographic coverage and thematic scope, serves as an important tool for policymakers and regulators in the development of financial markets on the African continent,” said Antonio Pedro, acting executive secretary, UN Economic Commission for Africa. “It provides in-depth comparative analysis to support the formulation of policies for long-term financial market development.”

SA, Mauritius and Nigeria remained in the top three in pillar one — market depth — which evaluates the size and liquidity of domestic capital markets, along with the diversity of listed asset classes and the existence of standard features that enhance market depth.

In this category, the report shows that liquidity has generally improved in the 12 months to June, even as unfavourable global conditions weighed on the size of most financial markets. 

SA — the continent’s most industrialised economy — showed strong performance and ranked number one overall; however, market sell-off and weak growth weighed on the overall score. Mauritius came in second, but lower reported pension assets affected its score.

Africa has, however, not been immune to the instability seen in global financial markets — due to factors including the Russian invasion of Ukraine, the global monetary tightening cycle, and stagflation fears. This has led to decreased value of market securities in Africa, while the depreciation of most African currencies worsened the sell-off in dollar terms.

The report showed that $210bn was wiped from the market capitalisation of the 26 countries in the index during the 12 months to June — which equates to a 13% year-on-year fall.

Declines were broad-based across the region. In dollar terms, the sharpest drops came in Zimbabwe (63%), Kenya (34%) and Seychelles (25%).

Despite this, more countries continued to show improvement — with Namibia, Uganda, and Kenya among the countries with the greatest increase in scores.

According to the report, these countries have bolstered their environmental, social and governance market frameworks and, in Kenya, climate risks have been incorporated into financial stability regulation.

Furthermore, greater product diversity has lifted scores for most countries as well, including Angola and Lesotho, which both issued their first initial public offerings over the past year.

“Despite macroeconomic headwinds, advances in sophistication, depth and transparency of African capital markets represent a considerable plus,” said David Marsh, chair at the Official Monetary and Financial Institutions Forum (OMFIF).

“A range of African countries now leads the field in key spheres. In one prime example, Africa has forged ahead in meeting requirements from investors targeting economic sustainability. There are many areas on which to build.”

“Continued progress on sustainability, digitalisation and financial inclusion will be crucial to improve Africa’s appeal and access to investors,” the report read. “This will enable the continent to develop its resilience to any future external shocks.” 

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