South Africa leads financial market index

A recent analysis highlights challenges and successes in Africa’s capital markets.
South Africa leads financial market index

Many African markets are putting policies in place to develop and open their financial markets, move towards more flexible exchange rates, and reduce capital controls, according to Danae Kyriakopoulou, chief economist at think tank OMFIF (Official Monetary and Financial Institutions Forum), speaking at the launch of the Absa Africa Financial Markets Index 2018 in Johannesburg, South Africa, in October.

Produced by the OMFIF, in association with pan-African banking group Absa, the index aims to gauge the maturity, openness, and investor-friendliness of Africa’s capital markets, as well as serve as a barometer for monitoring developments within the financial ecosystem. The report provides an assessment of financial market development in 20 African countries and highlights areas in need of improvement if these markets are to attract foreign direct investment. The key financial frameworks used by the index combined quantitative analysis and surveys of some 50 policymakers and leading executives.

While the addition of new entrants made it difficult to draw direct comparisons with 2017, overall South Africa held the top spot, followed by Botswana in second (having been third in 2017), Kenya in third (fifth in 2017), Mauritius in fourth (second in 2017) and Nigeria in fifth (sixth in 2017).

The index evaluated six pillars:

  • Market depth;
  • Access to foreign exchange;
  • Market transparency and the tax and regulatory environment;
  • Capacity of local investors;
  • Macroeconomic opportunity; and
  • The legality and enforceability of standard financial master agreements.

Of the six pillars, access to foreign exchange and the enforceability of contracts are particularly important for financial managers looking to Africa. The following major takeaways are particularly noteworthy:

Forex flexibility

Kenya overtook South Africa in this pillar, which considers whether capital controls exist and the depth of the market from a turnover perspective relative to GDP. “It also talks about the interbank counterpart, the products available for hedging foreign exchange rate and to what extent the system can absorb external shocks,” said George Asante, head of markets excluding South Africa at Absa Group.

While South Africa has exchange control regulations, Kenya has none, “so you can get your money in and bring it out anytime”, said Asante. Kenya’s portfolio flows-to-reserves ratio is also much lower than South Africa’s.

Wrapping up the top five in this category were Uganda, Botswana, and Zambia. Uganda, noted Asante, “is one of the markets where the central bank intervention is very professional. … This isn’t common in most markets in Africa.” Conversely Nigeria, ranked 11th, has “very high control over its capital accounts, so bringing money in and taking it out is not as easy”.

Enforceability of contracts

While the legal protections pillar is of particular importance, most countries on the index still need stronger legal and contractual tools.

For anyone managing money this category is critical, especially from a risk perspective. Asante noted that only six countries — South Africa, Mauritius, Kenya, Zambia, Rwanda, and Ghana (in that order) — offer “clarity around financial market transactions from a legal framework perspective”.

Where is the value?

The significance of the index for financial managers and accountants lies in being able to “understand what they can do and what they can’t in each of these markets”, said Asante. “There have been a lot of instances where a finance director will enter into a contract thinking they’re protected, but they aren’t.”

It also forces executives to look beyond return on investment into the practicalities of doing business in Africa. “It’s about identifying into which markets you can invest and be able to easily manage your financial risks versus where you are likely to have a problem or may have to apply the appropriate mark-up on expected returns,” said Asante.

This is what continues to make South Africa attractive. “It’s not just about higher growth, it’s the package,” said Asante. “South Africa has the package to realise opportunities and the infrastructure to do so.”

Cara Bouwer is a freelance writer based in South Africa. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at