The Absa Africa financial markets index 2023 – designed to measure the attractiveness of Africa’s financial markets – notes an improvement in 15 countries over the last 12 months, largely due to increased market transparency and particularly a rise in the number of credit ratings. The biggest movers are Zimbabwe and Rwanda, which have both made progress towards building sustainable financial market frameworks.
New assets are becoming available on domestic exchanges, including the first sukuk bonds in South Africa and Tanzania. Other countries are also looking to incorporate Islamic financial products, including Mauritius, Kenya and Ethiopia.
However, progress has not been uniform. Each country experienced a lower score in at least one market area, mainly due to unfavourable global conditions outside of African policy-makers’ direct control.
Rising interest rates in advanced economies have prompted exchange rate depreciation and capital outflows for many African countries. The challenging global environment has also impacted liquidity and the size of domestic financial markets in dollar terms.
Kobus Volschenk, Group Treasurer at South Africa-based automotive group Motus, observes South Africa has a well-established stock exchange that although strongly regulated remains an important source of funding.
“However, regulation has driven businesses to seek funding outside of this realm,” he says. “South African banks are well established in the African markets where we operate, allowing group involvement in the funding of businesses in those markets. But this just creates a foothold, with further banking and financial partner relationships in-country required as there are local nuances.”
In the current market environment of higher debt levels, interest rates and inflation, Volschenk says it is easy to imagine smaller businesses seeking funding would need to use other channels, including platforms created by fintechs. “Now more than ever, having an established balance sheet helps, and this complicates fund raising for smaller businesses,” he adds.
In the 12 months to June 2023, the aggregate stock market capitalisation of African financial markets initiative (AFMI) countries fell by US$50bn or 4%.
Corporate bond markets have also come under pressure, with the value of corporate bonds outstanding falling in dollar terms and as a share of GDP in 17 of the 22 index countries with these assets available on domestic exchanges over the same period.
Half of the 28 countries covered by the index lack market makers in secondary markets for bonds – though survey participants in Rwanda and Malawi said they are due to be introduced, which should improve liquidity and pricing.
The underlying message is one of slow progress in building capital markets. In 17 countries, scores are higher this year than when they were first introduced to the index but there is a wide gap between the highest scoring countries and the rest.
According to the report authors, there are three general areas where Africa’s investment climate could be improved. Firstly, liquidity is limited in domestic equity, fixed income and foreign exchange markets in most cases. Secondly, tax environments are becoming less conducive to investment in some jurisdictions. Finally, legislation to promote the use of standard master agreements remains sparse.
“Market depth is the main challenge for corporations accessing both public and private markets,” says Anthony Kirui, Head of Global Markets ARO at Absa. “While the regulatory landscape and costs are manageable, the problem tends to be finding sufficient demand for the capital to be raised. Accessing the debt capital and loan capital markets is cheaper than equity capital, so corporates are more likely to try this first.”
He adds that before assessing any of these markets, African companies looking to launch an IPO need to find a ‘story’ to tell the market.