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The COVID-19 Pandemic threw a spanner in the workings of the entire global economy. But the African continent, where the financial market ecosystem was fledging, was hit adversely hard. In response, policymakers, exchanges, and regulators have been inching back the mileage that was lost.

The silver lining of such a disjunct period is that foundational cracks are brought to the fore. Otherwise, infrastructure may have been constructed on uneven ground, perhaps leading to a more dramatic collapse. 

Now, African stability has become more relevant than ever before. Decades-old trade networks (through Russia and the Middle East) contend with geopolitical spillovers, turning eyes to the Global South. 

To track how the continent has responded to changing demands and challenges placed upon it by the international community, the Johanessburg-based bank Absa and the Official Monetary and Financial Institutions Forum (OMFIF) launched the Absa Africa Financial Markets Index in 2017. 

The primary intention of the index, which records the openness and attractiveness of financial markets in 29 African countries, was to make African markets more resilient to ‘sudden stops’. But since, its methodology has mapped financial best practices across the board. 

African financial markets are displaying remarkable vigour, with more than four-fifths of countries across the continent reporting improvements in market accessibility and depth, according to the latest Absa Africa Financial Markets Index.

Market depth

South Africa continues to reign supreme as the continent’s financial powerhouse, but Botswana’s striking transformation has caught investors’ attention. The landlocked nation has witnessed its stock market capitalisation surge to 255% of gross domestic product (GDP), up from 140% last year, cementing its position as Africa’s second-largest market relative to economic output. The convergence of dual-listed shares with their international counterparts has driven much of the repricing of Botswanan assets.

The embrace of environmental, social, and governance (ESG) instruments has emerged as a defining trend, with sustainable finance products now available in 12 African nations. Absa Botswana issued Botswana’s first domestically listed sustainable bond in December, earmarking funds for affordable housing initiatives.

Egypt, despite its macroeconomic challenges and proximity to disruptions in North Africa and the Middle East, has demonstrated commendable market depth. Egypt recorded the continent’s highest equity market turnover at 70.3%, whilst its sovereign bond market expanded significantly following the introduction of treasury bill trading last September.

Substantial upgrades have been made to market infrastructure across the region. The Ethiopian Securities Exchange, set to debut by year-end, represents perhaps the most ambitious development. As one of only three countries in the index without a securities exchange, its launch could unlock significant capital formation opportunities in Africa’s second-most populous nation.

Islamic finance is also gaining prominence, with Kenya’s inaugural domestic sukuk issuance in November highlighting the growing appetite for Shariah-compliant instruments. Tanzania has followed suit with various Islamic financial products, whilst Uganda is developing its regulatory framework for sukuk bonds.

However, external debt remains a significant concern, with the International Monetary Fund identifying 18 countries as either in or at risk of debt distress.

Access to foreign exchange

A wave of sweeping currency reforms is reshaping Africa’s financial landscape, as the continent’s largest economies move to tackle chronic foreign exchange (FX) shortages and mounting external pressures.

The reforms come as the continent’s FX landscape becomes increasingly bifurcated: while some countries are building comfortable buffers, others are skating on particularly thin ice.

On the east African coast, Ethiopia announced a dramatic shift to a free-floating exchange rate regime. The National Bank of Ethiopia’s move allows commercial banks to trade FX at market-determined rates, breaking with long-standing distortions. Even the Bank of Tanzania, traditionally conservative in its approach to currency markets, adopting 52 of the 55 principles from the international FX Global Code introduced a new interbank FX market code of conduct.

Some bright spots are emerging in capital market access. Côte d’Ivoire, Benin, Kenya, and Senegal successfully tapped international markets for $5.7 billion in Eurobonds during the first half of 2024, marking a return to global capital markets after a quiet 2023. In 2023, Madagascar’s interbank FX liquidity soared to over 250% of total trade, driven by new mining activities and public sector projects. The Indian Ocean nation now ranks second in the index’s FX accessibility measures.

On the other hand, in 2023, 14 African countries witnessed declining reserve coverage. Six countries — Zimbabwe, Ethiopia, Democratic Republic of Congo, Mozambique, Malawi, and Ghana — maintain reserves below the critical threshold of three months’ import cover, deterring foreign portfolio investors despite strong underlying market performance.

And some bold interventions, whilst theoretically a step towards a more predictable investment climate, came at the expense of citizens’ livelihoods: as was the case in the larger economies of Nigeria, Egypt, and Kenya.

In Zimbabwe, the introduction of the gold-backed ZiG currency in April — aimed at stabilising its volatile FX market — faced an early test with a 40% devaluation by September. The shockwaves of their 2008 hyperinflation crisis, which peaked at 79.6 billion per cent month-on-month and 89.7 sextillion per cent year-on-year, will take some time to fully subside.

ESG 

The burden of the global climate crisis falls adversely heavily on the African continent. Temperatures are warming faster than the global averages; in 2023, the continent contended with deadly heatwaves, rains, floods, cyclones, and multi-year droughts; and on average, African countries are losing 2-5% of GDP in response to extreme climates.

In response, the index has reported that 23 countries across the continent now have sustainability-focused policies in place. The number of jurisdictions conducting climate stress tests has jumped to eight, up from just South Africa = in 2021.

Rwanda and Zambia are frontrunners in climate risk management. Rwanda’s central bank mandating financial institutions to incorporate climate risks into their frameworks took a bold step in March 2024. Meanwhile, Zambia’s central bank conducted stress tests to assess the financial impact of the El Niño-induced drought, propelling both countries into the index’s top 10.

The push towards ESG integration coincides with broader improvements in market transparency. Corporate credit ratings, which provide investors with a detailed analysis of creditworthiness, have seen a marked increase.  The total number of international corporate ratings in indexed countries rose to 343 in the year to June 2024, up from 307 a year before. Focus on credit rating improvement, according to a Ugandan survey participant, will ‘improve borrower credibility and facilitate better access to financing’ for both SMEs and corporates. 

Charles Russon, interim CEO of Absa Group, described the improved scoring for 23 of the 29 countries as a “welcome respite” after the “higher domestic inflation and financing costs” that the COVID-19 pandemic brought. But per the results of the index, rather than one of respite, Africa seems to be in a period of opportunity and growth.

Africa’s vulnerability is now being mitigated by robust capital market structures, upon which to build. With this stability – of strong markets, improved FX access, and an ESG-centric approach to growth and climate change – capital flows should naturally divert to Africa in the coming year.