Improving access to financial markets is the best way for Africa to attract capital, South African bank Absa said this week as it launched its latest annual Africa Financial Markets Index.
It looks to develop financial markets in 26 different African countries, representing 78% of the population and 82% of GDP. Africa has a history of attracting foreign capital but has little record of raising its own through its domestic markets, which are largely undeveloped.
South Africa is the exception, boasting the most advanced and diversified economy in the region and a market cap of listed domestic companies of more than $300bn. The rest of the region is lagging.
“What we’re trying to do is to encourage African financial market development so that markets are open, transparent and accessible,” said Jeff Gable, chief economist at Absa.
To do this, the index measures several different indicators. The more information that is available, the more investable the country becomes. If a market only has foreign participants, money tends to leave as quickly as it arrives.
“Everyone is used to the narrative that Africa needs a lot of capital, so we want to make sure that the market structure is in place to not just to ensure the best chance of attracting foreign capital but also the capital on the continent,” he said.
Because there are not appropriate existing ways to invest this capital, he continued, it tends to get “stuck in people’s mattresses” or ends up in US Treasuries. Improving access to the market is the best way for Africa to put its own financial resources to use and to attract financial resources from the rest of the world.
Even with support, it will take some time for domestic capital to become a widespread source of major long-term financing for these countries, said Andrew Dabalen, the World Bank’s Africa region chief economist. “They are still young and still forming, but it’s going take some time for them to become nearly as complex, deep and sophisticated as the rest of the financial markets.”
Sub-Saharan African governments with smaller domestic capital markets came into this year with higher funding costs to start with, a situation that was made much worse as the dollar has grown in strength.
“In many cases, countries just don’t have access to foreign commercial markets anymore, or not significant amounts, Ghana is an example of this,” said Frank Gill, EMEA sovereign specialist at Standard & Poor’s. “Even the domestic market in Ghana is saturated with government paper and most of the gross financing this year so far in Ghana has been done through an overdraft facility with the central bank, and they are in talks with the IMF.”