The Absa Africa Financial Markets Index assesses the development of financial markets in 23 countries and highlights the economies offering the most favorable environment for efficient markets. The aim is to show the current positions of countries, as well as how economies can improve market frameworks to enhance investor access and sustainable growth.
The index assesses countries according to six pillars: market depth; access to foreign currency; market transparency, fiscal and regulatory environment; capacity of local investors; macroeconomic opportunity; and the enforceability of financial contracts.
This is an excerpt from Pillar 3: Market transparency, fiscal and regulatory environment.
Pillar 3 scores countries on the conducive nature of the regulatory environment for local and foreign investment, assessed through tax incentives, reporting standards and market transparency. On average, the scores fell by 8.2 points.
Part of the deterioration in the score is due to lower scores in Capital Market Development, resulting in points based on survey respondents’ assessment of relevant initiatives undertaken in their jurisdiction. Nigeria earns a place at the top of the pillar, just overtaking South Africa. Nigeria’s Securities and Exchange Commission is updating its 10-year capital market master plan, which runs from 2015 to 25, to reflect changes in market and economic conditions.
Another reason for the overall drop in ratings is the introduction of new indicators on environmental, social and governance factors, rating countries on the basis of policies that support the development of sustainable markets. The index also incorporates weather stress testing as one of the indicators of financial stability, an indicator for which only South Africa has gained points. Ten countries scored minimum points on the three new indicators, suggesting that despite the importance of sustainability in the financial sector discourse, more needs to be done to mainstream ESG into the region’s financial policies.
Figure 1. Scores drop due to lower scores on market development and the introduction of ESG measures
Kenya improves the most, advancing five places after scoring better on financial reporting availability and market development, while still being one of six countries to achieve the highest score in markets sustainable. A survey respondent pointed to the introduction of a securities lending and borrowing framework to increase liquidity on the Nairobi Stock Exchange. The Capital Markets Authority is working closely with other stakeholders on various market improvements, including the establishment of electronic OTC secondary market trading platforms and the development of Kenya’s green bond program. .
Mauritius and Morocco once again share top marks for their tax regimes. Both countries have a high number of double tax treaties, and Mauritius has tax exemptions for dividends. The number of tax agreements in 14 countries has increased, signaling that countries recognize the importance of encouraging foreign investment through tax breaks. Zambia has entered into 10 more tax treaties, the biggest increase in the index, helping it gain a spot.
Transparency and availability of financial information helps investors gain confidence in the markets they plan to enter. Almost all countries get full ratings on timeliness of financial market reporting except Namibia where there are no planned reporting requirements. Despite this, respondents in several countries expressed concerns about the quality of financial reporting. One interviewee in Nigeria noted that “the quality of financial reporting is still low and poor oversight by regulators has done little to improve it.” Another respondent from Uganda said there is “poor application of financial reporting standards for companies as prescribed by the Companies Act”.
Sovereign and corporate credit ratings help investors assess market environments. The pandemic has sparked a wave of negative credit rating measures since its inception, but the index rates countries based on whether or not they have a default-free sovereign rating. Angola, Ethiopia, Mozambique and Zambia lose points because they are not rated by the three international rating agencies.
The number of company ratings in the index countries fell from 205 to 179. The largest decline was recorded in South Africa, where 27 companies lost their ratings, although it still had the highest number. highest with 66. Egypt and Morocco each have four other rated companies. Tanzania had two, while Botswana, Ghana and Kenya each had one. The total number of ratings assigned by the regional rating agency GCR increased from 523 to 458. The number of ratings for Nigeria increased by 15, while Namibia’s increased by three.
Graph 2. More than half of the countries in the index obtain scores on ESG indicators
Encourage sustainable markets
Greening capital markets could be key to attracting investors looking for alternative asset classes, while allowing countries to finance sustainable projects. Some countries have introduced incentives and regulatory guidelines to support the development of sustainable financial products. In some jurisdictions, listed companies are encouraged to include information on ESG factors in their reporting.
Zambia has reduced registration fees for green instruments by 50% and issued guidance for issuing green bonds. Nigeria issued similar guidance in 2018, resulting in the issuance of corporate and sovereign green bonds.
More recently, in June, the Bank of Mauritius published guidelines for issuing sustainable bonds. One respondent said that “the sustainable bond guide provides an overview of the requirements and process for issuing durable bonds and listing these bonds on the Mauritius Stock Exchange… It does not just seek to ensure integrity of the sustainable financing ecosystem. in Mauritius but also to prevent greenwashing. ‘ The SEM also has a sustainability index that tracks the performance of listed companies on the basis of ESG measures.