Since the onset of Covid-19, financial markets around the world have been plagued by challenges and African markets have not been immune to these headwinds, says Jeff Gable, Head of Macro Research and fixed income securities at Absa Group.
We have seen rising interest rates, growth hampered by slow vaccination campaigns and volatile commodity prices. Russia’s recent invasion of Ukraine has only intensified these pressures.
Amid this, we have seen signs of deterioration in some elements of financial market development across the continent. As part of the 2021 edition of the Absa-OMFIF index of African financial markets, the majority of the 23 countries studied experienced an overall downgrade in rating. In general, the parts of the index most affected by recent conditions were the index pillars that seek to gauge market depth and transparency, as well as the capacity of local investors.
Faced with the dual challenge of revitalizing markets and strengthening market infrastructure, Africa is now navigating in an extremely delicate economic atmosphere.
The continent as a whole has not had to go through a large-scale financial crisis – however, some countries have demanded debt restructuring and the overall debt environment as measured by the debt sustainability framework of the IMF, highlights the growing risks ahead. With a focus on developing financial markets, many countries are using lemons to make lemonade – absorbing the warning signs thrown by the shock of a global pandemic and refocusing their attention on adapting the norms of the market to meet the needs of international investors seeking to diversify risk.
To give themselves the best chance of success, African markets must rely on green finance and digital transformation – two crucial trends to secure their future in the global economy.
ESG: the gateway to global pots
ESG assets are the door Africa must open to access global pools. Investors around the world are increasingly investing their money in ESG-certified assets, as such, a collective ESG-focused pivot is needed.
The fight against Covid-19 has been a priority, but several African countries have recognized the opportunities inherent in ESG-driven development. They have demonstrated their commitment to leading the charge over the past year and recognized the importance of mitigating climate-related risks to the financial system.
At the time the index rating was compiled, 13 of the 23 countries indexed had some level of ESG regulatory framework, with several introducing sustainable financial products. Constructively, further progress has been made by many index countries in the months since this rating.
Digitizing Africa: a track for many improvements
Digital technology and innovation is another important pathway to ensure the sustainability of African financial markets. For example, in order to attract investors and issuers, and to make capital markets more efficient and competitive, African nations have improved market infrastructure and regulatory support for the development of technology-based tools.
The Johannesburg Stock Exchange is developing a digital private placement platform to raise capital for infrastructure finance and small and medium enterprises. Another example of this is eSub, developed by the Central Bank of Rwanda. The platform allows people to buy and sell government securities using their mobile devices.
Although a crisis can divert investment from these initiatives, new technologies such as digital currencies and blockchain solutions offer the potential to significantly improve market efficiency – so it is crucial to continue investing during crises. .
Digital transformation can also lead to more growth and a higher standard of living in the long term. Digital transformation can grow domestic assets by making it easier for retail investors to participate in local equity and bond markets. Also, it can make the continent more competitive as it becomes easier for governments to finance themselves.
An Africa of the future
In the context of the pandemic recovery and the turbulence triggered by the Russian-Ukrainian war, Africa’s ability to continue to innovate offers positive prospects for the future.
Policy makers, investors and asset managers must not lose sight now. They should continue to monitor the openness and attractiveness of the African capital markets in which they participate.
As governments continue to face budgetary difficulties, debt pressures and a jobs crisis, not to mention devastating climate-related weather events, we remember that African nations have always persisted in moving forward against strong headwinds.
Fostering nascent initiatives in green finance and digitalization will be key to increasing Africa’s resilience to shocks and improving the region’s chances of enjoying a sustainable post-pandemic recovery. If adopted more widely, they have the potential to deepen national markets and contribute to the healthy development of financial markets.
By Jeff Gable, Head of Macro and Fixed Income Research at Absa Group