Sello Moloko, Absa Group Chairman
Leaders of business, government, civil society and others are debating the challenges facing the global economy – notably the rising cost of living and possible global recession – at the 2023 World Economic Forum (WEF) annual meeting in Davos this month.
It is important that African countries make their voices heard in global conversations to ensure that they have influence in shaping the world we live in. It was encouraging to see African voices feature strongly in the COP27 discussions on climate change recently.
Many African economies, like others globally, will face tougher times in 2023 as domestic economic growth slows and potentially recedes. While GDP growth in Sub-Saharan Africa is estimated at 3.6% this year, growth in per capita income over 2023-24 is expected to average just 1.2%, a rate that could cause poverty rates to rise, not fall, according to the World Bank forecasts.
It must be said that several African countries held up well compared with others at the height of the COVID-19 pandemic and later, in the context of the Russia-Ukraine conflict. Several will withstand the tougher global economic environment better in 2023, as a result of good policies, while others will benefit from global supply-chain changes amid ongoing geopolitical tensions elsewhere. Bucking the difficult economic trends of the past three years, some countries have continued to lay solid foundations for stronger and more resilient economies.
One measure of this progress is the development of financial markets across the continent. In our experience and as monitored through the Absa Africa Financial Markets Index, we have observed progress over the past few years, relating primarily to the accessibility, openness, and transparency of financial markets.
That these nations stayed the course of financial market development in the face of unprecedented nature of the past three years demonstrates their commitment to, and conviction that, developing financial markets is one key element to achieving progress in medium to long term socio-economic development.
The link here is that socio-economic development demands significant capital and that capital cannot be satisfied only by the mobilisation of domestic capital alone. Nor can multilateral development institutions and donors fill the gap sufficiently. Several African nations have been tapping bigger pool of global resources.
But foreign capital will only come to our shores if we operate financial markets that are easily accessible, open and transparent. Such markets are also conducive to the development and growth of domestic financial institutions, which in turn, contribute to the mobilisation of local capital.
The Absa Africa Financial Markets Index measures progress based on six key pillars: market depth; access to foreign exchange; market transparency; tax and regulatory environment; capacity of local investors; macroeconomic environment and transparency; and, legal standards and enforceability.
While these pillars are used to measure progress in the continent’s financial market development, each of them have wider socioeconomic benefits. For instance, improvements in the tax and regulatory environment can contribute to the ability of a government to collect more tax and therefore spend more on infrastructure development.
Let me highlight two areas of progress that we see as significant for the continent’s future, and more specifically in terms of attracting foreign funds. Foreign investors are increasingly becoming more attracted to assets that meet the sustainability criteria as measured by environmental, social, and governance (ESG) benchmarks.
It is therefore important for African nations to focus on the development of sustainable financial markets. A number of countries are doing this. As per the 2022 index, 17 of the 26 countries covered in the index had sustainability-focused financial policies, up from 12 the previous year. The next step will be the development of ESG-linked assets – progress has been made but there remains a long way to go.
Then there is digitalisation in the context of making financial markets more accessible and contributing to competitive and efficient markets. Digitalisation initiatives can be considered in three categories. Digital trading initiatives are helping improve accessibility of market information and therefore making financial markets attractive to both issuers and investors. There’s also the regulation of digital assets, another step towards the development of capital markets. Several central banks in Africa are also issuing, or considering issuing digital currencies, which could also result in greater access by citizens to the digital economy.
While there is progress in several of these areas, more can be done to deepen financial markets and doing so should not be seen in isolation to the efforts to advance socio-economic development. The two are very much tied.
Open, transparent and accessible financial markets are the best way to ensure that the continent can mobilise the funds it needs for its socio-economic development. Donors and multilateral development financial institutions have made a valuable contribution over the years. However, the needs are greater. Private investors, both domestic and foreign, can fill the gap, but they can also do so in well-developed and well-functioning financial markets.