Over the past decade, African economies have undergone a period of significant transition. Foreign investment interest has grown and there has been an extensive focus on the continent’s potential for mobilising local resources.

However, as we begin 2021, African countries are facing immense challenges arising from the global Covid-19 pandemic. The resilience of financial systems in every economy is being tested. Financial markets have been disrupted, but expansion and innovation in recent years should benefit the eventual rebound and recovery.

The longer-term outlook largely relies on the extent to which economic activity can resume in the local and global economy, but recent progress in financial market development will improve Africa’s chances of making a rapid and sustainable recovery. Despite the difficulties posed in 2020, some significant market developments and policy changes will help to boost growth and the sustainability of financial markets across the continent.

The initial effect of the pandemic was hardest felt by those countries with high levels of external debt, as global investors pulled back on investments. The withdrawal of international capital hit the region’s stock markets as liquidity dropped in the first half of 2020. The sudden fall in foreign activity showed the value of having deep and liquid local markets able to withstand external shocks. Central banks and financial policymakers across the continent responded by supporting local debt markets with a variety of tools, which have assisted greatly in mitigating the disruptive effects of the pandemic.

For money markets in particular, central banks across the continent have provided emergency liquidity throughout 2020 to quell the panic that struck in March and April, and markets have mostly calmed since.

To promote the functioning of domestic financial markets, some African central banks used the less conventional monetary policy tools developed over the past decade. The SA Reserve Bank, for example, implemented a programme of purchasing government securities on the secondary market. The central banks of Botswana, Egypt and Ghana also conducted asset purchases. The Bank of Central African States, which serves Cameroon, undertook purchases in a restricted way to ensure consistency with rules against direct monetary financing. Other, more common, policies included reducing repo rates, widening the collateral accepted for central bank lending facilities, and reducing liquidity and capital requirements for banks.

Linking exchanges

Much progress was made in linking exchanges within African financial markets over the past year or so. The Africa Exchange Linkages Project (AELP), for example, offers an important new opportunity to link African exchanges and boost cross-border activity. In April, the project began procurement for an order-routing technology platform to enable a broker on one exchange to channel a client’s buy or sell order to a broker on a second exchange, where a target security is listed.

The AELP is a joint initiative by the African Securities Exchanges Association and African Development Bank (AfDB) to encourage pan-African investment flows. It is funded by the Korea-Africa Economic Co-operation Trust Fund, through the AfDB. Pilot exchanges that are participating in the AELP include the Bourse Régionale des Valeurs Mobilières, the Casablanca Stock Exchange, the Egyptian Exchange, the JSE, the Nairobi Securities Exchange, the Nigerian Stock Exchange and the Stock Exchange of Mauritius. In addition, Cameroon’s Douala Stock Exchange merged with the regional Bourse des Valeurs Mobilières de l’Afrique Centrale towards the end of 2019, raising its equity market capitalisation to 1.1% of Cameroon’s GDP.

Africa may be heading for its first recession in more than 25 years, but there are many reasons to be optimistic about the continent’s growth prospects. Fiscal and monetary stimulus programmes are supporting local debt markets, helping prevent bankruptcies and spurring global demand and trade. The countercyclical liquidity support of multilateral development banks is helping countries adjust to Covid-induced macroeconomic pressures and liquidity strains. A recovery will largely rely on Africa’s commitment to macroeconomic stability.

Decreasing inflationary pressures and expectations have enabled central banks to extend monetary stimulus and other policy responses to support small- and medium-sized enterprises, helping these businesses avoid payment defaults. This shift, from a largely single-monetary policy objective across the continent (inflation-targeting), towards the dual objectives of price stability and growth, represents a significant change in the continent’s policy-making environment. This hopefully also signifies the beginning of a deepening integration of Africa into the world economy.

Another key driver of Africa’s improved financial market resilience is the newly implemented African Continental Free Trade Area agreement. The trade area was founded in 2018 and trade commenced from January 1 2021. It will take a while for intra-Africa trade to flow smoothly and at sustainable volumes (given the structural challenges still faced by various countries), but when trade does commence effectively, the benefit for economies across the continent will be significant. This is particularly poignant given the low levels of internal trade (hovering below 20% of total trade).

By expanding growth opportunities and returns on investment, African economies can better sustain investment flows and shift away from natural resources and towards the more labour-intensive manufacturing industries. This structural transformation will increase domestic resource mobilisation and deepen capital markets, helping set Africa on a path to better fiscal and debt sustainability.

• Delport is an investment analyst at Anchor Capital.

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