AFMI Highlights Africa Is Already Unlocking Its Potential

Author: Garth Klintworth, Head of Global Markets, Absa CIB 

The release of the seventh iteration of the Absa Africa Financial Markets Index (AFMI) demonstrates that the continent is rapidly maturing and is no longer simply taking the first steps on a developmental journey. Instead, we can see clear signs that the true potential of the continent is being unlocked. 

With support from the United Nations Economic Commission for Africa, coverage of the Index has grown to 28 countries – with the addition of Cabo Verde and Tunisia – and it now encompasses approximately 80% of the population and the Gross Domestic Product (GDP) of Africa.

After seven years of development through a series of incredibly challenging – and rapidly evolving – financial markets conditions, this year provides an opportunity to introspect and review where the Index has come from. 

From inception it has been key for us that the Index not be perceived as a measure which would carry biases or be viewed as punitive or critical in nature. 

Rather, we wanted to develop an Index that was independent and would be seen as enhancing the strength of financial markets on the continent. If we can strengthen capital markets, we can lower the cost of capital which in turn would drive investment. 

The partnership with the Official Monetary and Financial Institutions Forum (OMFIF) has been key in ensuring the independence and integrity of the Index. It’s possible for 2024, given that Capital Market Infrastructure relies on inexpensive and efficient platform services, we may focus on the use of cloud technology and solutions. 

To that end, we take a lot of pride in the fact that we enjoy robust debate with policy makers and Central Banks of all the major participants after the release of each iteration of our report. Even when countries take umbrage with some of the rankings, we see the follow-up engagements as a perfect opportunity to talk through OMFIF’s research findings. 

As the Index has become a key component in an investment toolbox for financial decision-makers, we constantly interrogate its credibility and how it influences decision-making. From an institutional supply side of capital, some of our institutions who have received mandates to invest in frontier or Emerging Markets use the report as a safety indicator to guide where they should deploy their capital based on the historical trends. 

At a country or sovereign level, we have also been able to utilise the Index to drive global best practices. The rapidly developing Ghanian swaps and derivatives markets is a case in point. Initially, Ghana was considering moving away from the Global Master Securities Lending Agreement (GMSLA) which was recognised as a global standard when it came to a compliance framework. By highlighting how other AFMI members were scored for adopting industry best practice, Ghana opted to align itself.

These developments encourage us, particularly as we unpack the results for the 2023 release.

For the second year running, scores have risen for the majority of AFMI countries. They increased in 15 countries largely due to an improvement in market transparency, particularly a rise in the number of credit ratings. Macroeconomic environment and market transparency scores have generally stabilised following previous shocks from the COVID-19 pandemic and the Russia-Ukraine conflict.

Zimbabwe and Rwanda’s Index rose by 2 points, linked to progress in building sustainable financial market frameworks. Zimbabwe has added climate risks as part of its financial stability regulation while Rwanda is working with multilateral organisations to improve market standards for green investments.

Overall, 20 AFMI countries now incorporate ESG-linked financial policies which can help to mobilise new investment.

Progress in the Index has not been uniform. Each country experienced a lower score in at least one of the six pillars. This is partly due to unfavourable global macro financial conditions. 

Rising interest rates in advanced economies has prompted exchange rate depreciation and capital outflows for many African countries. In the case of commodity importers, this has been compounded by a deterioration in trade balances. 

The challenging global environment has also impacted liquidity and the size of domestic financial markets which weigh on scores in market depth. The size of pension assets (in dollar terms) has also declined for most countries, which reduces scores in Pillar 4 which examines the capacity of local investors.

Egypt has been hit especially hard and its overall score falls by 2 points, with the country now ranking outside the top 10. Overall scores have also declined in South Africa, Nigeria and Uganda although they all maintain their position in the top five, alongside Mauritius and Namibia. 

There is no question that the AFMI has been a material contributor to strengthening African financial markets and with continued innovation, it will lower the cost of both transacting and capital, further reducing the risk premium associated with investment on the continent. As a leading Pan-African banking group, we look forward to utilising this tool to continue to unlock investment opportunities and we welcome the opportunity to engage with stakeholders on our findings.