Absa’s AFMI: Africa’s financial rise amid challenges

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 taking its first developmental steps. Instead, it is clear that Africa’s potential is being unlocked.

With support from the UN 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 about 80% of the population and the GDP of Africa.

After seven years of development through a series of challenging – and rapidly evolving - financial market conditions, this year provides an opportunity to reflect on and review how far the Index has come. 

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

Instead, Absa wanted to develop an index that was independent and would enhance the strength of financial markets on the continent. If we can strengthen capital markets, we can lower the cost of capital, which will drive investment. 

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

To that end, Absa takes pride in enjoying robust debate with policymakers and the central banks of all the major participants after the release of each iteration of the report. Even when countries take umbrage with some of the rankings, Absa sees the follow-up engagements as a perfect opportunity to talk through OMFIF’s research findings. 

AFMI’s growing influence 

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 institutions that 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 historical trends. 

At a country or sovereign level, Absa has also used 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 (MSLA), 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 are encouraging, particularly as we unpack the 2023 results.

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 two 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 environmental, social, and governance-linked financial policies, which can help 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 have 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 affected 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 four, which examines the capacity of local investors.

Egypt has especially been hit hard, and its overall score falls by two points, with the country now ranking outside the top 10. Overall scores have also declined in SA, Nigeria and Uganda — though 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 transacting and capital, further reducing the risk premium associated with investment on the continent. As a leading pan-African banking group, Absa looks forward to using this tool to continue to unlock investment opportunities and welcomes the opportunity to engage with stakeholders on the findings. 

About the author: Garth Klintworth is head of global markets at Absa Corporate & Investment Banking.   

This article was sponsored by Absa.