Africa Financial Markets Index 2017 · Exchange and is one of Africa’s largest diversified financial services groups. Barclays Africa Group offers an integrated set of products

Barclays Africa Group Limited

Africa Financial Markets Index 2017

Sponsored by Barclays Africa Group Limited

Barclays Africa Group Limited is not affiliated with Barclays PLC

2

The Official Monetary and Financial Institutions Forum is an independent think tank for central banking, economic policy and public investment – a non-lobbying network for best practice in worldwide public-private sector exchanges. At its heart are Global Public Investors – central banks, sovereign funds and public pension funds – with investable assets of $33.8tn, equivalent to 45% of world GDP.

With offices in both London and Singapore, OMFIF focuses on global policy and investment themes – particularly in asset management, capital markets and financial supervision/regulation – relating to central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher standards, performance-enhancing exchanges between public and private sectors and a better understanding of the world economy, in an atmosphere of mutual trust.


OMFIF Editorial and Marketing teamSimon Hadley, Production Manager, Kat Usita, Research Assistant Oliver Thew, Programmes Manager, Sarah Holmes, Head of Meetings, Sarah Butler, Assistant Head of Development, James Fitzgerald, Marketing Executive.

Barclays Africa Group Limited (‘Barclays Africa Group’ or ‘the Group’) is listed on the Johannesburg Stock Exchange and is one of Africa’s largest diversified financial services groups.

Barclays Africa Group offers an integrated set of products and services across personal and business banking, corporate and investment banking, wealth and investment management and insurance. We are strongly positioned as a fully local bank with regional and international expertise. We are committed to Shared Growth, which for us means having a positive impact on society and delivering shareholder value.

Barclays Africa Group operates in 12 countries, with approximately 40 000 employees, serving close to 12 million customers. As of June 2017, Barclays PLC is a minority shareholder in Barclays Africa Group.

The Group registered head office is in Johannesburg, South Africa and owns majority stakes in banks in Botswana, Ghana, Kenya, Mauritius, Mozambique, Seychelles, South Africa, Tanzania (Barclays Bank Tanzania and National Bank of Commerce), Uganda and Zambia. The Group also has representative offices in Namibia and Nigeria.

The Africa Financial Markets Index was produced by OMFIF in association with Barclays Africa Group Ltd. The scores on p.7 and elsewhere record the total result (max=100) of assessments accross Pillars 1-6. For methodology seee individual Pillar assessments and p.34-35.

OMFIF conducted extensive quantitative research and data analysis with additional data input from Barclays. Qualitative survey data were collected and analysed by OMFIF with significant in-country expertise provided by Barclays. The report was written by OMFIF, with Barclays acting in an advisory capacity.

© 2017 OMFIF Ltd. All Rights Reserved.

3

Acknowledgements

The authors consulted policy-makers, regulators and market practitioners across African financial markets in writing this report, whom we thank for their views and opinions.

Keith Jefferis, Managing Director, Econsult, Botswana

Keneetswe Maemo Ntebang, Manager (capital markets), Non-Bank Financial Institutions Regulatory Authority, Botswana

Mia Thom, Technical Director, Centre for Financial Regulation and Inclusion

Moustapha Coulibaly, Managing Partner, Grant Thornton, Ivory Coast

Evans Osano, Director, Capital Markets Development, and Vimal Parmar, Capital Markets Development Specialist, Financial Sector Development Programme, Africa

Edward George, Head of Group Research, and colleagues, Ecobank

Miguel Azevedo, Managing Director, Citigroup and Head of Investment Banking, Africa

Sunil Benimadhu, CEO, Stock Exchange of Mauritius

Vipin Y. S. Mahabirsingh, Managing Director, Central Depository & Settlement Co Ltd, Mauritius

Ngoni Bopoto, Research Analyst, Namibia Equity Brokers, Namibia

Frank H. Moormann, CEO, Financial Consulting Services, Namibia

Michelle van Wyk, Co-Head, RMB Namibia at FNB Namibia, and Conrad Dempsey, CEO, RMB Namibia

Omotola Abimbola, Investment Research, Afrinvest Securities, Nigeria

Wole Layeni, ARM Securities, Nigeria

Michelle Akinrinade, Investment Banking, Chapel Hill Denham, Nigeria

Peter Moses, Research Analyst, Cordros Capital, Nigeria

Kaodi Ugoji, Vice President, FMDQ OTC Securities Exchange

Tayo Adewale, Vice President, Equity Capital Markets, at Stanbic IBTC Capital Limited, Nigeria

Elmarie Hamman, Specialist, Capital Markets Department, Financial Services Board, South Africa

Eva Murigu, Associate Principal, Africa Strategy, Global Research, Standard Chartered Bank

Ermes Caramaschi, Managing Director, EA Capital, Tanzania

Isaac Sekitoleko, Research and Market Development Officer, Capital Markets Authority, Uganda

Kammy Naidoo, Global Programme Advisor, United Nations Capital Development Fund

Ayodele Odusola, Chief Economist and Head of Strategy and Analysis, Asha Kannan, Economic Advisor on Africa, and colleagues at the United Nations Development Programme

Nonde Sichilima, Manager, Market Supervision, Securities and Exchange Commission, Zambia

And individuals from the following institutions: Diamond Bank, PwC, International Monetary Fund, The Johannesburg Stock Exchange, SBG Securities Ltd. and Deloitte

Barclays Africa GroupJeff Gable, Chief EconomistGeorge Asante, Managing Director and Head of Markets (Africa ex. SA)

OMFIFDanae Kyriakopoulou, Chief Economist and Head of ResearchBen Robinson, Senior EconomistBhavin Patel, Economist

AFRICA FINANCIAL MARKETS INDEX 2017AFRICA FINANCIAL MARKETS INDEX 2017

4

11

15

19

23

2731

5

Contents

6-7 Forewords

8-10 Executive summary Contains country comparisons and highlights opportunities and challenges for the region’s financial markets.

11-14 Pillar 1: Market depth Examines size, liquidity and depth of markets and diversity of products in each market.

15-18 Pillar 2: Access to foreign exchange Assesses the ease with which foreign investors can deploy and repatriate capital in the region.

19-22 Pillar 3: Market transparency, tax and regulatory environmentEvaluates the tax and regulatory frameworks in each jurisdiction, as well as the level of financial stability and of transparency of financial information.

23-26 Pillar 4: Capacity of local investors Examines the size of local investors, assessing the level of local demands against supply of assets available in each market.

27-30 Pillar 5: Macroeconomic opportunity Assesses countries’ economic prospects using metrics on growth, debt, export competitiveness, banking sector risk and availability of macro data.

31-33 Pillar 6: Legality and enforceability of standard financial markets master agreements Tracks the commitment to international financial market agreements, enforcement of netting and collateral positions and the strength of insolvency frameworks.

34-35 Indicators and Methodology


AFRICA FINANCIAL MARKETS INDEX 2017AFRICA FINANCIAL MARKETS INDEX 2017

6 FOREWORDS

Partnership and collaboration

There is general agreement that growth momentum in Africa remains fragile, and that

the ‘Africa rising’ narrative is now far more nuanced than before, with different regions and indeed countries facing divergent economic prospects. Following from this, global financiers are de-risking and this puts the onus on stakeholders in Africa to take responsibility for addressing structural gaps in African financial markets in order to meet investment hurdles and continue to attract local and global capital.

Addressing these structural challenges will require partnership and collaboration from all partners. Importantly, a common fact-base is required to anchor conversations and facilitate discussions towards finding solutions. The African Financial Markets Index, which is a quantitative and qualitative assessment of the anatomy of Africa’s financial markets, is an important tool in this endeavour. The Index intends to drive conversations among policy-makers, market participants and other partners to address gaps and track progress on an ongoing basis.

While what will be successful or effective interventions will be heavily dependent on country-specific circumstances, I fundamentally believe that addressing legal, infrastructural, and consistent publication of market data gaps is critical to Africa’s ability to tap into local and global savings pools. Mobilising these resources will help accelerate productive investment that contributes to sustainable domestic employment creation and generates income to service the underlying debt.

The inaugural African Financial Markets Index is an important barometer measuring the progress and potential of Africa’s financial markets.

Africa has unmatched capacity in terms of talents, natural resources, a young, growing and increasingly

urban population, and a hugely entrepreneurial spirit. It has faced challenges from the post-2014 commodity cycle downturn, but the impact on countries across the continent has been varied. Some have increased their growth rates as a result of cheaper energy imports and falling borrowing costs. Others, hit by lower export prices, have sought to improve their economic governance, increase the sustainability of their fiscal positions and diversify their economics sectors in order to improve resilience to future shocks. This is creating a strong basis on which to achieve sustainable growth.

Developing financial markets infrastructure and attracting private capital from Africa and beyond are key elements in Africa’s development. This can offer additional growth and funding opportunities for local firms, providing access to long-term financing and helping them overcome some of the challenges of low lending rates and high costs across the continent. Financial market development also offers opportunities for international and domestic investors to access fast-growing African countries. In the context of low returns on assets in more traditional markets, this is an ever more important consideration.

This report by OMFIF and Barclays Africa Group comes at an important point in the transition of African economies and is a welcome contribution to understanding these opportunities and risks. It provides a useful tool for the asset management community as well as for African countries generally in order to gauge their performance against their peers. In exploring the nuances and regional or local differences that are often overlooked in analyses of the continent, it provides a balanced account of African financial market development.

At a time when the ability to attract foreign investment is becoming increasingly important to Africa’s growth prospects, I hope this report will heighten international understanding of and interest in our continent. This is a compelling account of the main issues affecting African financial market development, and I warmly commend it.

Africa’s financial market opportunities

Célestin MongaVice President and Chief Economist, African Development Bank

Peter MatlareExecutive director, Barclays Africa Group Ltd

AFRICA FINANCIAL MARKETS INDEX 2017

1 South Africa 92 Highly developed markets but challenging macroeconomic outlook

2 Mauritius 66 Strong regulatory and legal framework constrained by low market turnover

3 Botswana 65 High level of openness but lacking product diversity

4 Namibia 62 Restrictive regulations hamper strengths in size and openness

5 Kenya 59 Strong contract enforcement but over-cautious regulators

6 Nigeria 53 Large economy with good prospects but improvements in transparency needed

7 Ghana 49 Substantial growth from a low base provides financial market opportunities

8 Rwanda 48 High transparency and adherence to standard master agreements

9 Zambia 47 Relatively high level of product diversity but low liquidity

10 Uganda 47 Good foreign exchange access but low local investor capacity

11 Tanzania 44 Relatively high market transparency hindered by capital restrictions

12 Morocco 42 Capital restrictions and low transparency hamper prospects

13 Ivory Coast 41 Regional exchange creates growth opportunities from low base

14 Egypt 39 Problems from international reporting standards and contract enforcement

15 Mozambique 37 Low market depth and transparency holding back development

16 Seychelles 29 Good economic growth but lack of financial market breadth and depth

17 Ethiopia 22 Fast-growing economy but no financial market depth or local investor capacity

INTRODUCTION 7

South Africa ahead, others show strengths

Development of local investor capacity and ability to attract foreign capital are key points of focus for African economies. Countries across the continent are

implementing a growing number of national policy frameworks for market development. The Index intends to track progress annually, supplying a toolkit for countries wishing to build financial infrastructure. Given its size and historical position, South Africa tops the 2017 list. Others are closing the gap. Mauritius and Botswana have strengths in tax and regulation and access to foreign exchange. Kenya and Ghana provide signs of progress. Ivory Coast, with a low overall score, is home to a growing regional bourse, pointing to future improvement.

Score across all pillars, max = 100.


8 EXECUTIVE SUMMARY

Building Africa’s financial markets

>p.10

The Africa Financial Markets Index evaluates financial market development in 17 countries, as well as highlighting economies with clearest growth prospects. The aim is to show not just present positions but also how economies can improve market frameworks

to meet yardsticks for investor access and sustainable growth. The Index assesses countries according to six pillars: market depth; access to foreign exchange; tax and regulatory environment and market transparency; capacity of local investors; macroeconomic opportunity; and enforceability of financial contracts, collateral positions and insolvency frameworks.

In addition to quantitative analysis, OMFIF gained additional insights by surveying 60 top executives from financial institutions operating across the 17 countries, including banks, investors, securities exchanges, regulators, audit and accounting firms and international financial and development institutions.

Morocco

020406080

100

00

1

2

3

4

5

6

1

2

3

4

5

6

Ivory Coast

020406080

100

0

1

2

3

4

5

6

Pillar 1: Market depth

Pillar 2: Access toforeign exchange

Pillar 3: Market transparency, tax and regulatory environment

Pillar 4: Capacity of local investors

Pillar 5: Macroeconomic opportunity

South Africa 99Mauritius 60Egypt 54Kenya 49Morocco 48Nigeria 47Botswana 44Namibia 44Zambia 43Uganda 42Tanzania 41Ghana 41Mozambique 40Ivory Coast 33Rwanda 21Seychelles 16Ethiopia 10

South Africa 87Botswana 82Uganda 79Ivory Coast 74Namibia 70Kenya 64Mauritius 56Nigeria 56Ghana 53Zambia 53Rwanda 40Tanzania 40Egypt 39Mozambique 33Morocco 33Seychelles 29Ethiopia 24

South Africa 95Mauritius 95Nigeria 94Rwanda 82Botswana 79Tanzania 69Kenya 68Ghana 67Morocco 65Ivory Coast 59Uganda 57Zambia 57Namibia 54Mozambique 48Egypt 40Seychelles 28Ethiopia 20

South Africa 100Namibia 94Botswana 49Mauritius 38Kenya 31Tanzania 28Morocco 28Egypt 25Seychelles 18Mozambique 18Nigeria 16Rwanda 14Zambia 13Uganda 13Ghana 12Ivory Coast 12Ethiopia 10

South Africa 73Nigeria 67Namibia 67Uganda 66Morocco 65Kenya 65Botswana 63Mauritius 58Seychelles 56Rwanda 55Mozambique 55Egypt 54Ghana 54Tanzania 49Ethiopia 47Zambia 47Ivory Coast 42

OVERALL PILLAR SCORES max = 100

9

South Africa

Namibia

Ghana

020406080

100

2

35

6

1

4

40

1

2

3

4

5

6

020406080

100

0

1

2

3

4

5

6

020406080

1001

2

3

4

5

6

0

20

40

60

80

1001

2

3

4

5

6

Zambia

020406080

100

40

1

2

3

4

5

6

Rwanda

020406080

100

0

1

2

3

4

5

6

Uganda

020406080

100

20

1

2

3

4

5

6

Mozambique

020406080

100

20

1

2

3

4

5

6

Seychelles

020406080

100

20

1

2

3

4

5

6

Tanzania

020406080

100

2

1

2

3

4

5

6

Kenya

020406080

1001

2

3

4

5

6

Ethiopia

020406080

1001

2

3

4

5

6

Nigeria

020406080

100

20

1

2

3

4

5

6

Egypt

020406080

100

00

1

2

3

4

5

6

Mauritius

020406080

100

60

1

2

3

4

5

6

Botswana

Pillar 6: Legality and enforceability of standard financial markets master agreements

South Africa 100Mauritius 93Kenya 81Rwanda 76Zambia 73Botswana 70Ghana 67Namibia 42Tanzania 37Nigeria 35Seychelles 30Mozambique 30Uganda 28Ivory Coast 23Egypt 21Ethiopia 18Morocco 15

OVERALL PILLAR SCORES max = 100

Pillar 1 Market Depth

Pillar 2 Access to foreign exchange

Pillar 3 Market transparency, tax and regulatory environment

Pillar 4 Capacity of local investors

Pillar 5 Macroeconomic opportunity

Pillar 6 Legality and enforceability of standard financial markets master agreements

KEY



The report finds that:

l While South Africa achieves the highest score for the

index as a whole (92 out of a possible 100), despite its

macro challenges. Many indicators, including GDP growth

and export competitiveness, have deteriorated recently.

l Mauritius, in second place in the Index with an overall

score of 66, is fast improving across a range of key areas.

It has one of the strongest financial legal frameworks

as well as a favourable tax environment and market

transparency, scoring above 90 in both pillars.

l Ethiopia achieves the lowest

score out of all countries in the

Index owing to the lack of a

securities exchange, minimal

local investor capacity and low

enforceability of contracts.

l The greatest area for

improvement for the Index as

a whole is the capacity of local

investors. Beyond the two top-

scoring countries of South Africa

and Namibia, which average 97,

the remaining countries average

just 22. According to respondents

to the OMFIF survey, increasing

the range of assets for local

investors, as well as boosting

education around financial markets, is key to developing

this sector.

l Transparency, tax and regulatory environment (Pillar

3) is the highest-scoring within the Index, with many

countries having improved their financial market rules

E

SE

41

4447

4573

N

W

S

SOUTHERN AFRICA SHOWSTHE WAYAverage results by region

in recent years. However, implementation of existing

regulations remains a key challenge for many countries.

l Challenges including low commodity prices, weak

external demand and reduced capital inflows facing the

continent mean that no country achieves top marks for

macroeconomic opportunity – the highest score, for

South Africa, is just 73. However many countries have

significant prospects for development, leading to an

overall average score of 58 for this pillar – the second

highest in the index after Pillar 3

(transparency, tax and regulatory

environment).

l South Africa, Egypt and Kenya

score relatively highly for liquidity.

However, liquidity remains a major

issue for most of the countries in the

Index. While market capitalisation

averages 61% of GDP across

all countries, turnover is low.

Excluding Egypt and South Africa

equity turnover is just 2.4%, while

excluding South Africa and Kenya

bond market turnover is just 4.2%.

High liquidity for Egypt and Kenya

exists despite the low availability of

international credit ratings for these

countries. Boosting the number of ratings could lead to a

rapid growth of these markets in coming years.

l Access to foreign exchange remains a substantial

challenge in most Index countries, despite its primary

importance to developing local financial markets. Capital

controls have increased over the last three years in

Rwanda, Tanzania and Zambia, and remain severe for

Egypt, Morocco and Mozambique, contributing to low

scores for these countries.

l Partly as a result of these restrictions, portfolio

investment flows remain low across the Index countries.

As a share of GDP, net portfolio flows averaged just 6%

in 2016, although Mauritius is a substantial outlier with

net portfolio flows equal to 60% of GDP. The relative

openness of South Africa, Mauritius and Kenya means

they have the highest net portfolio investment flows in

absolute terms, of $9bn on average, against $440m on

average for all other countries.

l Africa’s financial markets, while growing, remain

fragmented. Survey respondents emphasised the

importance of encouraging regional bourses, cross-border

listings and harmonised regulatory standards as key to

improving financial markets across the different regions.

However beyond the regional stock exchange in western

Africa, such coordination remains limited.

AIM OF INDEXAt this important point in the transition of African

economies, and with growing foreign investment

interest in the continent and its potential for

mobilising local resources, the Index provides a useful

tool for the investment community as well as for Africa generally to gauge countries’ performance.

Pillar 1:Market depth

PILLAR 1: MARKET DEPTH

African financial markets have traditionally suffered from a lack of

depth relative to other regions. This has been a key factor holding back the ability of firms and investors within and beyond the continent to exploit expansion opportunities. Investors need to access suitable assets in the required sizes and with the desired financial characteristics, while African firms require growth finance from abroad that is often not available from domestic or regional sources.

More than 20% of African businesses view access to finance as the biggest

obstacle to growth, according to the World Bank Enterprise Survey, against around 13% on average for the rest of the world (excluding Africa). This highlights the need to increase financing options via the development of financial markets.

The issue is particularly pronounced for small and medium-sized enterprises, which form the backbone of the economy as the largest job creators and as the largest combined share of output, and which experience severe challenges in accessing bank financing. This is partly the result of high concentration across the banking sector in Africa. The market

share of the three largest banks in Africa is, on average, over 70%, according to the World Bank, contributing to high interest rate spreads. The high cost of loans in turn challenges the private sector’s access to credit. Owing to information asymmetries, a high degree of informality and other factors, banks have focused their lending on large enterprises and government entities as a way to minimise their risk exposure.

These difficulties have been compounded by regulatory issues such as the type of assets that are acceptable as collateral for bank loans. The World Bank estimates that African businesses’ assets are composed, on average, of 75% ‘movable assets’ (including inventory, equipment, farm products, accounts receivable and intangibles) and just 25% real estate. Yet, collateral requirements are on average 80% real estate and 20% moveables. These factors mean many African companies are unable to secure bank financing, resulting in a significant gap in access to finance across the continent.

Analysis from the International Monetary Fund shows that relaxing these borrowing constraints could increase GDP levels by between 8% (in Nigeria) and 20% (in the West African Economic and Monetary Union) through a substantial improvement in total factor productivity over the long term.

Pillar 1 of the Africa Financial Markets Index measures market depth using five categories made up of 14 indicators (see Figure 1.1). These include the range of financial products, currencies and hedging options available across national exchanges, as well as the size of financial

12

South Africa scores highest for market depthDespite a general increase in active market participants and the size of financial assets relative to GDP across the continent, access to deep markets remains a challenge for investors and companies.

Figure 1.1: South Africa tops list for depth and liquidityPillar 1 breakdown: Ranking of individual categories, max = 500 (LHS) Harmonised score, max = 100 (RHS)

Source: National Stock Exchanges, African Securities Exchanges Association, Thomson Reuters, Barclays, National Central Banks, Barclays Africa Financial Markets Index and OMFIF Survey. Note: Individual category totals (LHS) provide rankings for product diversity, liquidity, size of markets, depth and primary dealer system. The harmonised score (RHS) represents the average of all categories’ indicators, and is used to compile the total scores for Pillars 1-6. More information on p.34.

0102030405060708090100

050

100150200250300350400450500

Sout

h Af

rica

Mau

ritiu

s

Egyp

t

Keny

a

Mor

occo

Nig

eria

Bots

wan

a

Nam

ibia

Zam

bia

Ugan

da

Tanz

ania

Gha

na

Moz

ambi

que

Ivor

y Co

ast

Rwan

da

Seyc

helle

s

Ethi

opia

Product diversity Size of markets Liquidity

Depth Primary dealer system Harmonised score (RHS)

“Liquidity is negatively affected by the structure of investors - many of the assets are

held to maturity by pension funds.”

Senior manager, Big Four accounting firm, Zambia

assets relative to GDP. Turnover and liquidity across the different markets is a key element. Existence of effective primary dealer systems and secondary market makers is also measured.

South Africa is the highest scorer across all indicators, reflecting its highly developed market infrastructure and deep connections with other countries in the region, as well as its role as an intermediary for financial market participants from countries outside Africa to access the continent.

The market capitalisation of listed companies in South Africa stood at over 350% of GDP at end-2016, with turnover (the ratio of equities traded to total market capitalisation) at 41% (see Figure 1.2).

The next largest country by market cap is Botswana, with listed companies valued at almost 270% of GDP. However, with much lower trading volumes, turnover of equities to market cap was only 0.6% in 2016, giving it a significantly lower liquidity score. Egypt has the highest equity turnover ratio, at more than 54%, though its total market capitalisation is just under 11% of GDP. Across other countries tracked as part of the index, market capitalisation averages 27% of GDP, when excluding Botswana and South Africa.

Bond markets show a similar pattern. With the exception of South Africa, Tanzania and Kenya, low trade volumes are the norm, despite high nominal figures for bonds outstanding in many countries. This partly reflects the nature of domestic investors, which tend to be large buy-and-hold institutions.

While low market activity is reflected in the low score for liquidity indicators across the index countries, with the exception of South Africa and Egypt, the situation is gradually improving. According to respondents to the OMFIF-Barclays survey of African financial institutions, there have been increases in liquidity conditions over the past 12-24 months in Botswana, Ivory Coast, Mauritius and Nigeria, reflecting progress on the speed of transactions as well as the cost of listing or accessing assets (see Figure 1.3 on p.14).

However significant hurdles remain regarding product diversity. These include the low availability of hedging products and currencies offered on exchanges, as well as the overall size of markets and the ability to attract foreign investors.

13

secondary markets. However, activity and turnover on these markets remains relatively low. Excluding South Africa (with a turnover ratio of almost 1000%), the average ratio of traded bonds against total bonds outstanding is just 14%, as Figure 1.2 shows.

Boosting market depth

Institutions surveyed in this research emphasised the importance of increasing small and medium-sized enterprises’ access to financial markets, including through dedicated market segments, as a vital means of deepening markets. Improving the regulatory and policy environment is a prerequisite for attracting foreign capital (see Pillar 3 for more details). This is particularly important following the post-2014 collapse in energy and commodity prices, which has caused domestic capital to retrench and commodity-related foreign investment to decline (see Figure 1.4 on p.14).

Yet there are fears that attempts by securities exchanges to boost market


COUNTRY SNAPSHOTS

BotswanaStrengths High market capitalisation, low capital controls, high regulatory bank capital ratios Areas for improvement Low interbank foreign exchange trading, very low bond market and equity turnover, limited product diversity

Ivory Coast

Strengths Development of regional bourse to boost liquidity and funding options, high central bank reserves to portfolio flow ratio Areas for improvement Compliance with reporting and accounting standards, official exchange rate reporting standards

Mar

ket c

apita

lisat

ion,

%

of G

DP

Tota

l tur

nove

r of e

quiti

es,

% o

f M

arke

t cap

italis

atio

n

Tota

l tur

nove

r in

bond

mar

ket,

%

bon

ds o

utst

andi

ng

Tota

l sov

erei

gn a

nd c

orpo

rate

bon

ds

outs

tand

ing,

liste

d on

exc

hang

es, $

bn

South Africa 358 41 970 195Egypt 11 54 23 39 Kenya 28 8 48 9Tanzania 18 2 4 2 Morocco 57 9 1 55Mozambique 9 0 4 0Nigeria 13 4 0 16 Ivory Coast 35 4 4 5 Mauritius 80 4 0 6 Seychelles 10 2 - 0Zambia 32 0 15 2 Botswana 269 1 5 1Uganda 25 1 - 2Ghana 32 1 7 12 Namibia 24 1 0 12 Rwanda 40 1 2 0Ethiopia - - - -

Figure 1.2: Market size and liquidity

Source: Thomson Reuters, National Stock Exchanges, African Securities Exchanges Association, OMFIF analysis

As Figure 1.5 shows currency availablity of products on the 17 stock exchanges is highly diverse. In addition, only South African rand-denominated local bonds can be cleared on international platforms such as Clearstream or Euroclear. This underlines the relative lack of depth of other markets and their shortcomings in accessing international capital. The quality and quantity of secondary market-makers have improved over recent years, with 11 out of the 17 countries having established


0

5

10

15

20

25

30

35

40

Average2005-09

2010 2011 2012 2013 2014 2015 2016 2017

Inward portfolio investments Outward portfolio investmentsNet portfolio flows

Figure 1.4: Net portfolio flows have fallen rapidly since 2012Figures for Africa as a whole, $bn

Source: National Exchanges, OMFIF survey

Source: African Development Bank, OMFIF analysis

Figure 1.3: How African markets rank - a qualitative assessment Harmonised results based on seven survey indicators, max =700

14

depth are being hindered by some central banks out of ‘concerns about financial market-related volatility’, according to Kenya-based investors. In other countries, notably Egypt and Morocco, foreign exchange restrictions and limited currency convertibility have hampered financial market development (see Pillar 2 for more details).

Elsewhere, increased hesitancy among foreign investors has been set off by domestic policies, such as the New Equitable Economic Empowerment Bill in Namibia. There are additional concerns that large, state-owned enterprises dominate capital market transactions in some countries, while smaller companies face difficulties.

The issue of openness is an important focus for investors. As Pillar 2 explores, the level of control on access to foreign exchange is a key factor determining investment flows.

“There is a pressing need to reduce

the cost of market transactions, entry

and presence. We must create a compartment for SMEs to boost the overall market.”

Executive, Big Four accounting firm,

Ivory Coast

0

100

200

300

400

500

600

700

Product diversity Cost Speed InformationAccess to int'l investors Regulatory environment Liquidity

Sout

h Af

rica

Mau

ritiu

s

Keny

a

Rwan

da

Zam

bia

Bots

wan

a

Gha

na

Nam

ibia

Tanz

ania

Nig

eria

Moz

ambi

que

Ugan

da

Ivor

y Co

ast

Egyp

t

Mor

occo

Source: Barclays survey. Note: Survey respondents were asked to rank seven measures of financial markets with scores of 1-5. A weighted average was applied to the results, harmonised on a 10-100 scale. Seychelles and Ethiopia excluded due to incomplete responses.

Figure 1.5: Currency availability of stock exchange products in 17 countries

OtherRenminbiSwiss FrancSterlingYenEuroDollarLocal Currency

Mauritius Ivory Coast

Unavailable currency

Available currency

KEY:

Pillar 2: Access to foreign exchange

16

Foreign investors’ ability to deploy capital relatively easily and repatriate

it when required, within acceptable time limits and in appropriate amounts, represent a key criterion for well-functioning financial markets. The presence (or absence) of capital controls, and the extent thereof, are therefore key considerations when assessing the state of financial markets. The level of foreign exchange liquidity and easily accessible, up-to-date foreign exchange data provide important measures of financial resilience. The ability of central banks to manage foreign investors’ demand for domestic currency is a vital additional indicator.

As in Pillar 1, South Africa ranks the highest in the index, reflecting its limited capital controls, high official exchange rate reporting standards, harmonised domestic exchange rate, and liquid interbank foreign exchange market (see Figure 2.1). The main challenge for South Africa’s financial markets is the relatively high ratio of portfolio investment flows to foreign exchange reserves. By contrast, Ethiopia, at the foot of this particular listing, ranks well below average in access to foreign exchange.

The South African Reserve Bank has the highest holdings of foreign currency across the 17 countries, standing at almost $40bn (excluding gold) at end-2016. However, this is less than 14% of GDP. Barclays and OMFIF have used as an indicator of foreign exchange resilience the ratio of currency reserves to portfolio stocks and flows. In South Africa, foreign reserves are less than 20% of the net stock of foreign portfolio investments. Net portfolio flows to South Africa in

2016, at minus $16.4bn, were equivalent to 40% of foreign exchange reserves. This indicates a certain vulnerability, as the ratio is the fourth highest across the 17 countries after Mauritius (where portfolio inflows of $7.2bn in 2016 were 166% of reserves), Namibia (with a ratio of 67%) and Kenya (with 46%).

A high ratio of portfolio investment flows compared with foreign reserves could be a source of financial instability in the event of large and sustained

outflows which cause the exchange rate to depreciate and general financial conditions to tighten. However, they also indicate a high degree of openness which is crucial to the development and smooth functioning of financial markets. Illustrating the dual nature of this indicator, the two countries with the highest level of net portfolio flows in 2016, South Africa and Mauritius, are also the two top-scoring countries for the overall Africa Financial Markets Index.

Capital controls: stability combined with vulnerabilityLower commodity prices confront governments with difficult choices. Capital controls can help stabilisation, but impede foreign investment. South Africa and Botswana show a mixed approach.

Figure 2.1: Ethiopia trails in access to foreign exchangePillar 2 breakdown: Ranking of individual categories, max = 400 (LHS) Harmonised score, max = 100 (RHS)

0102030405060708090100

050

100150200250300350400

Sout

h Af

rica

Bots

wan

a

Ugan

da

Ivor

y Co

ast

Nam

ibia

Keny

a

Mau

ritiu

s

Nig

eria

Gha

na

Zam

bia

Rwan

da

Tanz

ania

Egyp

t

Moz

ambi

que

Mor

occo

Seyc

helle

s

Ethi

opia

Official exchange rate reporting standard Capital controls

Interbank forex turnover Total net portfolio flow ratio to reservesPillar 2 Overall score (RHS)

Source: International Monetary Fund BOPS and Article IV, National Central Banks, OMFIF analysis. Note: Individual category totals (LHS) provide rankings for the exchange rate reporting standard, capital controls, interbank forex turnover and the net portfolio flow ratio to reserves. The harmonised score (RHS) represents the average of all categories’ indicators, and is used to compile the total scores for Pillars 1-6. More information on p.34.

PILLAR 2: ACCESS TO FOREIGN EXCHANGE

17

Part of the reason for large investment flows in these countries is the low level of capital controls. South Africa, Mauritius, Botswana and Namibia have the lowest severity of foreign exchange restrictions (see Figure 2.2), and are again the four highest-scoring countries for the index as a whole. Tanzania and Rwanda have the lowest portfolio flow to reserves ratios, at 0.1% and 0.3%, respectively. Rather than signalling strength, however, this reflects in part the severity of their capital controls. This is one of the reasons why portfolio investment flows were just $5m and minus $3.2m, respectively, in 2016.

Currency volatility a challenge for open economies

Openness to foreign financial flows coincides with risks. The South African rand (and by extension the Namibian dollar which is pegged to the rand) were the most volatile currencies during 2016, with an average monthly standard deviation of almost 2.1%. Tanzania experienced the lowest volatility, with

Figure 2.2: Limited capital controls buoy southern African financial markets

Morocco

GhanaIvory Coast

Nigeria

Egypt

Ethiopia

KenyaUganda

Rwanda

Tanzania

Zambia

Namibia

Botswana

South Africa

Mozambique

Seychelles

Low-severity capital contolsModerate-severity capital contolsHigh-severity capital contols

a standard deviation of just 0.1%. However, as investors indicate in their responses to the survey, lack of currency movement, when resulting from currency controls and other restrictive measures, can present sources of instability in the longer run as asset fundamentals and the relative strengths and weaknesses of the economy are obscured. Part of Tanzania’s low volatility results from its currency restrictions. As Figure 2.3 on p.18 indicates, southern and eastern African countries have the most flexible exchange rate regimes, boosting their relative scores within the index.

Availability of high quality and frequently reported exchange rate data, as well as the existence (or absence) of a unified exchange rate, further influence countries’ scores in Pillar 2. Some countries have multiple rates, published by the central bank, securities exchange, and other official sources, in addition to unofficial rates. This can impede asset valuations and increase exchange rate

risks. South Africa, Botswana, Egypt and Mauritius are among those with a unified exchange rate, together with clear and frequent publication of official data, therefore achieving high scores. Ivory Coast has the lowest score for this indicator.

An important gauge of foreign exchange liquidity is the amount of foreign exchange traded in the interbank market. South Africa has by far the most active market, with almost $1.2tn turnover in 2016, according to central bank data. Kenya is in second place with almost $34bn and Ghana follows with $18bn. Beyond these countries, foreign exchange turnover is relatively low. This can reduce transaction speed and lower liquidity. These circumstances reflect market structures across Africa. As one Namibian financial firm indicates, among the components of the index, ‘Most capital providers sit in South Africa’ rather than domestically.

The importance of low capital controls and accurate foreign exchange data for attracting foreign capital and developing local markets is a recurring theme in

Mauritius



the OMFIF-Barclays research. As the managing director of a large international banking group with operations across Africa says, ‘Many investors believe the economics and business environment are rather exotic in Africa. So you need governance requirements, reporting standards and trading rules in line with international norms. There is no room for African exceptions – investors do not accept that.’

Market participants highlight importance of attracting foreign capital

Concerns over capital openness, official foreign exchange data reporting and foreign exchange liquidity are highly relevant in the competition to attract foreign investors. Senior members of a ‘Big Four’ accounting firm with offices throughout Africa highlight that ‘The main challenge is low volume of trade

affecting liquidity. As many African economies are relatively small, capital markets must be developed by attracting international investors to Africa’. This is supported by the chief executive of a Namibian financial services consulting firm, who emphasises that many African countries have ‘very limited sources of domestic capital’, and ‘must look outward for investors’.

Yet in some countries, market participants feel that government policy is having a ‘very negative effect’ on attracting such capital. Capital controls have increased over the last three years in Rwanda, Tanzania and Zambia, and remain severe for Egypt, Morocco and Mozambique. Investors can view negatively laws such as the New Equitable Economic Empowerment Bill in Namibia, which requires all businesses to have 25% ownership by black Namibians and 50% of top management to be from previously disadvantaged groups. As

one respondent from Namibia explains, ‘We do not have enough sufficiently qualified people in the country to fill all these positions.’ Company performance may suffer. ‘Local businesses can stop investing locally and export capital. This can motivate foreign investors to look for greener pastures elsewhere.’

Some countries are boosting their domestic investor base. Mauritius is implementing incentives to ‘raise the ratio of local investors to total population from the current of 10% to a minimum of 20% in the next five years’, according to the chief executive of the Mauritius stock exchange. This partly requires increasing the range of products local investors want to hold. As analysis in Pillar 3 makes clear, the commodity price downturn, and the need to create extra generators of growth, has intensified the requirement to attract foreign capital. Tax, regulatory and transparency issues are fundamental to this.

“Many financial market initiatives have

been stopped by the Kenyan central bank, out of concerns about potential impact on volatility. It would be ideal if they are

implemented.” Country expert, international financial institution, Kenya

Figure 2.3: Countries’ exchange rate regime and average monthly standard deviation of currency value, 2016, %

Morocco0.6

Ghana1.1

Ivory Coast0.9

Nigeria1.7

Egypt1.7

Ethiopia0.2

Kenya 0.1

Uganda0.4

Rwanda0.4 Tanzania

0.1

Zambia0.4

Namibia2.1

Botswana1.1

South Africa2.1

Mozambique1.3

0.5

0.3

Intermediate regimeFixed regime

Flexible regime

18

Pegged

Mauritius

Seychelles

Pillar 3: Market transparency, tax and regulatory environment

0.5

Intermediate regimeFixed regime

Flexible regime

Pegged

20

PILLAR 3: MARKET TRANSPARENCY, TAX AND REGULATORY ENVIRONHMENT

Robust financial market infrastructure is of vital importance for attracting

foreign investors and incentivising greater domestic investor participation. This requires a strong regulatory and operational environment, high quality reporting and accounting standards, and the availability of relevant financial information published regularly.

What is needed is a tax environment which, at the minimum, does not penalise financial market transactions and which, at best, aims to encourage them via incentives and other fiscal measures. Such a framework is especially

important in the early stages of market development. South Africa scores highly given its relatively high number of tax treaties with other countries (80 against an average of 22 for the 17 countries) and the existence of various tax incentives. These include the absence of capital gains taxes on financial transactions, securities transfers and dividends. South Africa has a relatively low average rebate time for withholding taxes, less than six months.

Rwanda has the lowest number of tax treaties, at just four, and has a 15% withholding tax on foreigners, among the highest in the 17 countries. Mozambique,

the Seychelles and Egypt score low for financial market transaction-related taxes, owing to a mixture of low tax treaties and financial market incentives, high withholding, capital gains and other taxes, and often long rebate periods.

Protection of minority shareholders and solid rules governing corporate actions such as share buybacks and rights issuance are necessary. Moreover, they are useful indicators of market development. Morocco, Uganda, Namibia Mozambique, Egypt and the Seychelles achieve low scores, while South Africa, Mauritius and Nigeria score highly.

Regulatory framework improving but uneven

Figure 3.1: Need for quality financial reporting Pillar 3 breakdown: Ranking of individual categories, max = 800 (LHS) Harmonised score, max = 100 (RHS)

0102030405060708090100

0100200300400500600700800

Sout

h Af

rica

Mau

ritiu

s

Nig

eria

Rwan

da

Bots

wan

a

Tanz

ania

Keny

a

Gha

na

Mor

occo

Ivor

y Co

ast

Ugan

da

Zam

bia

Nam

ibia

Moz

ambi

que

Egyp

t

Seyc

helle

s

Ethi

opia

Financial stability regulationTax environmentMarket developmentProtection of minority shareholdersPillar 3 Harmonised score (RHS)

Reporting and accounting standardsFinancial information availabilityCorporate action governance structureExistence of credit rating

Strong regulations can enhance financial stability, particularly in underdeveloped markets, but the costs of implementation can be high. African countries must address overlapping regulations and a lack of coordination.

“The Nigerian stock exchange

is a good example for

others in terms of the quality of reporting

and regulatory frameworks. If

others adopt this approach, that

would make a big difference.”

Managing director, multinational bank

Source: Bank of International Settlements, IFRS, Deloitte IAS plus, World Bank Ease of Doing Business, S&P, Moody’s, Fitch, Barclays Africa Financial Markets Index and OMFIF Survey. Note: Individual category totals (LHS) provide rankings for financial stability regulation, tax environment, market development, minority shareholder protection, reporting/accounting standards, financial information availability, corporate action governance structure, existence of credit rating. The harmonised score (RHS) represents the average of all categories’ indicators, and is used to compile the total scores for Pillars 1-6. More information on p.34.

21

of holding riskier assets and incentivising large institutions to hold on to their high quality assets.

Most countries of the 17, with the exception of Ivory Coast, Egypt, Ethiopia, Mozambique and the Seychelles, follow International Financial Reporting Standards (see Figure 3.2).

However, market participants responding to the survey highlight that, despite the existence of these rules in theory, many countries ‘may not in practice possess the requisite personnel for adequate financial reporting and internal audit’.

Some of the reported ‘low competence levels in IFRS’ are the result of ‘rapid changes to regulations, such as IFRS 9, IFRS 15, IFRS 16 and IFRS 17’, which makes compliance more difficult for firms in developing countries, according to a multinational development agency operating in Kenya.

Often there is a ‘divergence between large companies that are heavily regulated, such as banks and insurance companies, and the many smaller companies seeking external financing’, according to representatives of a Nigerian securities firm. ‘Active regulation and enforcement of existing rules are needed.’

As shown in the ‘reporting and

The managing director of a large multinational bank with operations across Africa notes, ‘The Nigerian Stock Exchange is a good example for others in terms of the quality of reporting and regulatory frameworks.’ The NSE publishes weekly data on volume, value and turnover for listed assets, monthly reports on transaction speeds, spreads and price movements, and on domestic versus foreign ownership of assets, among other data points. The exchange has been active in strengthening regulatory capacity. In 2016 it implemented a broker oversight and supervision system to improve the efficiency and security of regulatory communication between the exchange and its members, as well as a tool for reporting market violations and a trade surveillance system. As survey respondents argued, ‘If others adopt a similar approach this will make a big difference to developing national financial markets.’

On regulatory and reporting issues, most African markets remain far less developed than the main financial centres of Europe, Asia and North America. This is partly reflects the fast-changing nature of global financial regulations and reporting standards following the global financial crisis. Of the 17 countries in the index, as Figure 3.3 shows, just seven are implementing the Basel III international regulatory framework for banks. Nine are implementing Basel II rules, and one – Ethiopia – has implemented Basel I only. The high costs of regulatory capital required by Basel III can limit financial market activities by increasing the costs

Figure 3.2: Implementation of international financial reporting standards by jurisdiction

IFRS requiredIFRS permitted but not requiredGAAP only

Morocco

GhanaIvory Coast

Nigeria

Egypt

Ethiopia

KenyaUganda

Rwanda

Tanzania

Zambia

Namibia

Botswana

South Africa

Mozambique

Seychelles

Mauritius

Botswana III

Ivory Coast II

Egypt II

Ethiopia I

Ghana II

Kenya III

Mauritius III

Morocco III

Mozambique II

Namibia II

Nigeria III

Rwanda II

Seychelles III

South Africa III

Tanzania II

Uganda II

Zambia II

Figure 3.3: Implementation of Basel rules (I, II or III)

Source: Bank for International Settlements, national central banks, OMFIF. Note: Judgement based on a stated plan of implementation. Mauritius, Kenya, and Seychelles implementing both Basel II and III aspects. Ghana is finalising Basel II this year. Morocco implemented Basel III capital adequacy in July 2015, but continues to adopt other aspects. Uganda still uses the Basel I capital adequacy ratio.



accounting standards’ component of Pillar 3, Ethiopia, Egypt, Ivory Coast, the Seychelles and Mozambique have the lowest scores, while South Africa, Mauritius and Nigeria are among the highest.

Boosting regulatory coordination

In some cases, the need to regulate financial markets has led to overlapping rules which hinder market development. The chief executive of a pan-African bank based in Namibia stresses, ‘Coherence between the various financial industry regulators, and the speedy resolution of conflicts when they arise, are important areas to address.’

In many countries these problems are being tackled by the creation of capital markets authorities and national policy frameworks for developing financial markets. The OMFIF-Barclays ‘market development’ category indicator shows an active approach to financial market development in Egypt, Ivory Coast, Rwanda, Ghana and Nigeria.

Independent assessment of a company’s financial prospects, through external credit ratings, and the establishment of benchmarks for pricing financial assets, are necessary for creating investable assets. As an

international financial development agency, participating in the survey, said, ‘the primary and benchmark securities market must be developed’ as this is ‘the basis on which instruments in the capital markets can be priced’. This is important for attracting institutional investors. Many are required to invest exclusively in benchmark-eligible securities.

South Africa ranks highest in terms of availability of external credit rating. Its sovereign debt is rated by all three main international agencies and it has the highest number of corporate ratings of any of the index countries (see Figure 3.4). South African corporates combine a total 85 ratings by S&P, Moody’s and Fitch, against 28 in Mauritius, the next highest-scoring country. Nine countries in the index have no corporate credit ratings at all.

Although Egypt and Kenya have a low number of corporate ratings, they have relatively high liquidity scores for equity and bond turnover. This suggests that an increase in the number of ratings by international agencies and the development of domestic ratings agencies could lead to a significant catch up with South Africa’s dominant liquidity position,

Survey respondents highlight the importance of a stable regulatory environment. ‘The development

of capital markets is a function of underlying investment and capital deployment activity, which in turn looks towards regulatory certainty.’ The absence of regulatory certainty can be highly damaging. A large Namibian bank emphasises that the current regulatory environment ‘is seriously hampering Namibia’s image as an attractive investment destination’.

Market participants are clear that ‘regulators must be flexible in dealing with the ever-changing financial landscape. Incentives should be available for the creation of new financial products as well as the development of existing instruments’. Indeed, one representative of a large and highly active securities exchange in southern Africa comments that ‘while there is a move to tighten regulation, which is good when there is low audit quality, it could come at a cost to deepening the market.’ Regulatory coordination and harmonisation are important for reducing the costs of compliance and accelerating market development.

This is an important consideration not just for attracting foreign investors but also for boosting the participation of local investors, including pension funds and insurance companies. This is a primary concern for many securities exchanges seeking to increase market activity and raise liquidity. As Pillar 4 explores, the development of domestic assets that are attractive to local investors, and the creation of a regulatory environment that helps increase local investor capacity, are fundamental to boosting local financial markets.

Morocco

17 0

South Africa 14

38 33Namibia

500

Ghana1

00

Kenya 100

Nigeria

1 160

Egypt

12

0

Mauritius 618 4

Figure 3.4: Top scorers in pan-African corporate credit ratings

Note: The number of corporates rated by S&P, Moody’s and Fitch.

S&P Moody’s Fitch

22

COUNTRY SNAPSHOTSEgypt

Strengths High market liquidity, high equity turnover, effective primary dealer system in place Areas for Improvement Regulatory environment, FX restrictions limiting market growth, Prohibitive capital controls

Ethiopia Strengths High GDP growth from a low base, low bank NPL ratio Areas for Improvement Lack of securities exchange, limited access to foreign exchange, weak financial infrastructure

Pillar 4: Capacity of local investors

Domestic institutional investors across African markets, particularly pension

funds, have become an important force in local economies. Their assets have been boosted by improving pension and investment regulations and GDP expansion over the last decade. The value of pension assets across Africa increased by over $81bn from 2008 to 2015, while insurance assets grew by $65bn over the same period. In some countries hit by low commodity prices and currency

depreciation, however, this trend has begun to reverse.

The relatively small size of local financial markets and the relative illiquidity of their assets have created difficulties for the growth and development of local investors. Even though local investor assets have increased over the past decade, local financial markets have often not kept pace. The scores in Pillar 4 track the capacity of local institutional investors

(pension funds and insurance companies) according to their per capita assets under management and the size of their AUM against the total value of domestic financial market assets, weighted by liquidity.

Too big for the market

The size of South African pension fund assets per capita, at $7,800, makes the country an outlier in the sample.

Lack of liquid assets holds back domestic investorsLocal investors’ capacity has a crucial bearing on financial markets. Across Africa, local investors require a more complete asset market to meet their objectives. Asset shortages restrict African investors’ choice and push them towards international markets.

Figure 4.1: Dominant Namibian pension/insurance fundsPillar 4 breakdown: Ranking of individual categories, max = 200 (LHS) Harmonised score, max = 100 (RHS)

0102030405060708090100

020406080

100120140160180200

Sout

h Af

rica

Nam

ibia

Bots

wan

a

Mau

ritiu

s

Keny

a

Tanz

ania

Mor

occo

Egyp

t

Seyc

helle

s

Moz

ambi

que

Nig

eria

Rwan

da

Zam

bia

Ugan

da

Gha

na

Ivor

y Co

ast

Ethi

opia

Pension and insurance assets to domestically listed assetsPension fund assets under management per capitaPillar 4 Harmonised score (RHS)

Source: African Development Bank Group, OECD, National Stock Exchanges, African Securities Exchange, Thomson Reuters, Barclays Africa Financial Markets Index. Note: Individual category totals (LHS) provide rankings for pension and insurance assets as a ratio of domestically listed assets, and pension fund AUM per capita. The harmonised score (RHS) represents the average of all categories’ indicators, and is used to compile the total scores for Pillars 1-6. More information on p.34.

COUNTRY SNAPSHOTSGhana Strengths Steadily growing pension assets, strong export market share, enforceable collateral positions and netting and set-off privisions Areas for improvement High NPL ratio, weak insolvency framework, low domestic investor capacity

Kenya Strengths High regulatory bank capital ratios, high reporting and accounting standards, active bond market and foreign exchange liquidity Areas for improvement Low historical growth in export market share, low GDP per capita, relatively small market capitalisation

Mauritius Strengths High net portfolio flows, strong regulatory environment, committed to international standard agreements Areas for improvement Low trading of corporate and sovereign bonds, despite large market size, low domestic investor capacity

24

PILLAR 4: CAPACITY OF LOCAL INVESTORS

25

Source: African Development Bank, OMFIF analysis.

Figure 4.2: Ghana’s pension fund assets grew by 50% in 2015Assets under management of private and public pension funds, annual change in 2015, %

-40

-30

-20

-10

0

10

20

30

40

50

60

Gha

na

Ugan

da

Mau

ritiu

s

Bots

wan

a

Rwan

da

Ethi

opia

Egyp

t

Nig

eria

Nam

ibia

Tanz

ania

Keny

a

Mor

occo

Zam

bia

Sout

h Af

rica

Seyc

helle

s

Moz

ambi

que

Ivor

y Co

ast

Its total pension and insurance assets to domestically listed assets is 50%, against an average of 30% for the index countries. As South Africa’s market is highly liquid, it achieves the maximum score of 100 in the index (see Figure 4.1).

Namibia ranks second in Pillar 4, with a score of 94. The value of pension assets in Namibia totalled $14.4bn in 2015 (latest available data). This is much lower than the index average of $46bn, yet in per capita terms it is relatively high, at $4,175 against an average of $1,087 across the countries tracked in the index.

Namibia’s total ratio of local investment assets to listed assets is very high, at 99%, but this high score is partly the result of a low domestically listed asset to GDP ratio of 24%. The lack of asset availability and the concentration of assets held by long-term buy-and-hold investors means that turnover is very low. Listed bonds and equities on the Namibian Stock Exchange recorded a market turnover of $1bn in 2016 against $2.9tn for South Africa. As a result, investors are pushed towards accessing international markets to find deeper and more liquid assets to meet their investment objectives. The subsequent illiquidity of the domestic market reduces Namibia’s total score in the index.

Namibia’s low capital control restrictions mean investors are able

Tota

l pen

sion

and

insu

ranc

e fu

nds

asse

ts, $

bn

Tota

l bon

ds o

utst

andi

ng a

nd

mar

ket c

apita

lisat

ion,

$bn

Figure 4.3: On average countries’ local funds are 35% the size of their locally listed assetsLocal pension and insurance fund assets, and total value of bonds and equities listed

South Africa 627 1,247Morocco 44 114Nigeria 32 69Seychelles 17 0Namibia 14 15Egypt 13 75Kenya 13 28Botswana 9 41Mauritius 6 16Tanzania 5 11Uganda 2 8Ghana 2 26Ivory Coast 2 17Rwanda 1 3Zambia 1 9Mozambique 1 2

Ethiopia 1 -Source: African Development Bank, national securities exchanges, Thomson Reuters, OMFIF analysis

COUNTRY SNAPSHOTS

Morocco Strengths Strong underlying macro opportunity, low external debt and highly competitive consumer market Areas for Improvement Weak legal and regulatory framework, low foreign exchange turnover, low bond and equity turnover, erratic growth in recent years

Mozambique

Strengths Strong economic performance forecasted in next five years, strong official exchange rate reporting standards Areas for Improvement High debt-to-GDP ratio, severe capital controls, small market size, low liquidity

to go abroad relatively easily. This has allowed institutional investors to achieve relatively good earnings in the past. Regulations require pension funds and insurers to invest 35% of their assets domestically. By October 2018 this requirement will rise to 45%, increasing the restrictions on the investment opportunities of local investors to the local market, which is likely to ‘mean a change in earnings and performance’, according to a large Namibian bank.

Zambia has a low score in the index as a result of a relatively small domestic market and low domestic investor AUM. However the National Pension Scheme Authority plans to increase local investor capacity. There are plans to list at least three companies a year to meet a growing domestic demand.

Seychelles is an extreme case, where the size of local investors dwarfs the value of domestic assets. But the $17bn total local fund value listed in the table does not distinguish between the pension fund (around $90m) and insurance fund assets, which make up the remaining value. Many funds benefit from the islands’ advantageous offshore business laws and tax environment by domiciling their funds there. This contributes to the marked disparity between the value of insurance funds and the Seychelles pension funds.



On average, 50% of institutional investors in Africa allocate a portion of their portfolios to assets outside their own market, although their investments remain largely within their own regional bloc. As highlighted in the analysis in Pillar 1, diverse, liquid and deep markets attract investors from outside the home market. As examples, Namibian investors are active in South African markets and Kenya is active in the Mauritian market, reflecting the high liquidity of these locations.

A key consideration for developing local markets is to increase the range of product offerings attractive to domestic investors. According to the cheif executive of a large east African securities exchange, this should include developing exchange traded funds and improving brokers’ marketing of these products. Additional ways of increasing attractiveness include ‘enticing listed companies to increase free float’, and also persuading non-listed companies to seek a stock market listing.

Growth of local investors

Currency depreciation as a result of worsening current account deficits during the downturn in commodity prices have led to negative valuation effects. The value of pension fund assets in the index countries fell by over $113bn, while the value of insurance assets fell by $25bn, between 2014-15.

The majority of pension fund losses between 2014 and 2015 were in net commodity exporting countries, including South Africa and Nigeria. Ghana was an exception, as pension assets grew by over 50% in 2015, the largest increase across the 17 countries. This was largely the result of a higher asset base, stemming from an increase in the participation of informal-sector firms, which employ up to an estimated 85% of the working age population, which has boosted Ghana’s pension assets. Regulations including the National Pensions Act 2008, which requires an additional 1% pension contribution to be shared between employee and employers in the private sector, have contributed to the growth.

Growth in the capacity of local investors, as well as the size of listed assets, depend, in part, on the prospects for economic growth and stability in the coming years. While the commodity cycle downturn has created challenges, it has also forced countries to improve their domestic environment in order to increase their international attractiveness.

26

COUNTRY SNAPSHOTSNamibia Strengths Low FX restrictions, high market transparency, high domestic investor assets Areas for Improvement Challenging policy environment, low liquidity in domestic bond market

Nigeria

Strengths Low FX restrictions, high market transparency, high domestic investor assets, low debt-to-GDP ratio Areas for Improvement Economy highly exposed to commodity prices, weak insolvency framework

RwandaStrengths Strong insolvency framework, low debt-to-GDP ratio, high export market growth Areas for Improvement: Lack of product diversity, low financial market liquidity, relatively high tax on financial market transactions, low regulatory bank capital ratios

Seychelles

Strengths High regulatory bank capital ratios, high GDP per capita Areas for Improvement Low market liquidity, limited availability of financial information, low financial product diversity

South Africa

Strengths: High market capitalisation, liquidity and product diversity, favourable tax policies, strong regulatory environment and transparency Areas for Improvement Low GDP growth, low competitiveness and falling export market share

Tanzania Strengths High bond market liquidity, relatively high financial market transparency, below average debt-to-GDP ratio

Areas for Improvement: Severe capital restrictions, underdeveloped derivatives market

“The requirement for local asset investment for pension

funds and long-term insurers is increasing from 35% to 45% by October 2018. This will increase the flow of investments within

the country, even though investment opportunities are limited. The number of local

and dual-listed stocks on the Namibian exchange is a restrictive factor, reflecting

an overall lack of local assets. Secondary market trading is

very limited, with mainly buy/hold strategies.”

Executive, large Namibian Bank

Pillar 5: Macroeconomic opportunity

28

GDP growth across Africa as a whole was 2.4% in 2016, down from 4.2%

in 2013 – the last year before the rapid decline in oil and commodity prices – according to IMF data. The subsequent collapse in commodity prices had a significant impact on export revenues, fiscal balances, currency values and capital inflows across the continent. The countries tracked by the Africa Financial Markets Index have performed better than the African average, with growth of 3.8% in 2016, although they have experienced a larger absolute fall since 2013, when growth was 6%.

Nigeria and Botswana are the only countries to have experienced negative annual GDP growth since 2013, with minus 1.5% in 2016 for Nigeria (down

from around 6% in 2013) and minus 1.7% in 2015 for Botswana (down from 11.3% in 2013). However, the economies of Morocco, Mozambique, Namibia, South Africa and Zambia have also faced difficulties. In 2016 Namibia experienced just 0.1% GDP growth (against 6.5% in 2014) and South Africa less than 0.3% (down from 2.5% in 2014). While Morocco grew by nearly 1.5% in 2016, this is down from almost 5% in 2013. Rwanda, Egypt, Uganda, Mauritius and Kenya are the only countries where growth has accelerated over this period, with their growth rates increasing by 1.3, 1, 0.7, 0.4 and 0.3 percentage points, respectively.

The pace of economic expansion across the 17 countries is expected to

pick up in 2017 and 2018, to 4.5% and 5.1% respectively, driven by recovering commodity prices, improvements in macroeconomic management and a rise in domestic demand.

Macroeconomic framework

However, growth prospects are not even. Past experience highlights that a supportive macroeconomic framework, with sustainable monetary and fiscal policies, is highly conducive to encouraging investment and providing resilience in the face of uncertain external conditions.

Pillar 5 assesses the underlying macroeconomic opportunity through three key areas: economic performance (GDP growth, export competitiveness and living standards), financial risks (overall debt levels and strength of bank balance sheets), and macro transparency (monetary policy committee communication, budget communication and data standards).

Sound policies

The indicator for GDP growth used in the Index is a composite of the five-year historical average for each country (2011-16) and a five-year forecast (2017-22), weighted equally (see Figure 5.1). Some countries given relatively high growth projections by institutions such as the IMF, including Namibia and Morocco, achieve a lower score in the index because of periods of low or erratic growth over the past five years. This instability has often been the result of problematic debt dynamics, low levels of

Growth prospects and government policiesCountries with diversified economic structures and strong domestic demand have coped better with commodity price fluctuations. There is a high premium on sound macroeconomic management propelling sustainable growth.

Source: International Monetary Fund WEO, Barclays Africa Financial Markets Index

Figure 5.1: Growth has weakened but is more stable Compound annual growth rate, five-year average and forecast, %

0

2

4

6

8

10

12

Ethi

opia

Rwan

da

Ivor

y Co

ast

Tanz

ania

Ugan

da

Ghan

a

Keny

a

Moz

ambi

que

Egyp

t

Zam

bia

Bots

wan

a

Mor

occo

Nam

ibia

Mau

ritiu

s

Seyc

helle

s

Sout

h Af

rica

Nig

eria

2011-16 2017-22 Historical average Forecast average

PILLAR 5: MACROECONOMIC OPPORTUNITY

29

export competitiveness or dependence on single sources of growth, mainly commodities, which can harm long term growth prospects.

When including these factors, Ethiopia, Ivory Coast, Rwanda and Tanzania score highly for GDP growth. They are relatively unexposed to commodity price shocks owing to the low share of commodities in their economies, and have relatively diversified sources of growth. They are however developing their economies from a relatively low base. On a per capita basis GDP ranges from $1,500 for Ivory Coast to just $730 for Rwanda, against an average of $3,500 for the 17 countries as a whole.

Export competitiveness

The export competitiveness of countries in the index provides an important indicator of future growth prospects. Strong export figures can reflect both sound domestic economic policies and diverse export partners, which can be useful to minimise negative demand shocks.

Ghana has increased its export market share by over 166% in the past five years, indicating significant improvements in competitiveness, although its overall market share remains small, at 0.02%

globally. The average for countries in the Index is 0.11%. Nigeria’s market share has fallen by 40%, but remains large in absolute terms (see Figure 5.4). South Africa has both the largest export market share as well as the largest decline in export share growth over the past five years, indicating falling competitiveness and lower demand for its exports in an arduous external environment.

Banking sector risk

The macro opportunity score on the Index is influenced by each country’s exposure to specific financial risk. This is determined by external debt to GDP levels as well as by the quality of assets in the banking sector. This latter factor is an important consideration as countries with high non-performing loan ratios may face elevated financial risks and vulnerability to external shocks. This has repercussions for the wider domestic economy. Economic or political shocks can further reduce the value of assets used as collateral and affect overall bank profitability and lending levels. Ghana’s NPL ratio of almost 15% is more than double the Index average of 6.2%, while at the other end of the scale Ethiopia’s NPL ratio is only 2.1%.

These data must be viewed in context,

however. Across Africa banks are often reluctant to lend to smaller borrowers owing to risk aversion, information asymmetry and lack of collateral assets. By focusing lending on larger companies banks may reduce their vulnerability to rising NPL ratios, but at the expense of lowering credit to smaller and medium sized businesses that need it. Ethiopia’s low NPL ratio reflects, in part, the difficulty of smaller borrowers in accessing bank financing. Ghana, by contrast, has a more accessible banking sector.

Meanwhile, risks associated with tightening monetary conditions in the US, or a period of heightened investor risk aversion or a financial shock to emerging markets generally, could cause yields to rise, creating problems for countries with high external debt. Countries covered by the Index have an average debt to GDP ratio of 50%, led by high debt levels in the Seychelles and Mauritius, at 203% and 127% of GDP, respectively. Nigeria, Egypt and Botswana all have ratios below 20%.

Financial transparency

The transparency of monetary policy decisions and of fiscal and budgetary data is important for avoiding policy

Figure 5.2: Benefits of low banking risk and financial transparency Pillar 5 breakdown: Ranking of individual categories, max = 700 (LHS) Harmonised score, max = 100 (RHS)

0102030405060708090100

0100200300400500600700800

Sout

h Af

rica

Nig

eria

Nam

ibia

Ugan

da

Mor

occo

Keny

a

Bots

wan

a

Mau

ritiu

s

Seyc

helle

s

Rwan

da

Moz

ambi

que

Egyp

t

Gha

na

Tanz

ania

Ethi

opia

Zam

bia

Ivor

y C

oast

GDP growth Living standardsGrowth and absolute export market share Quality of bank assetsDebt profile Macro data standardsMPC outcomes transparency Budget releasePillar 5 Harmonised score (RHS)

COUNTRY SNAPSHOTS

Uganda

Strengths Low foreign exchange restrictions, capital market development agenda Areas for Improvement Low living standards, low GDP per capita, low net portfolio flows, low market liquidity

Zambia

Strengths Relatively high product diversity, high reporting and transparency standards Areas for Improvement Increase in capital restrictions, regulatory system favours large corporations and discourages local businesses, low market liquidity

Source: International Monetary Fund WEO and Article IV, World Bank MEC, National Central Banks, National Finance Ministries, African Development Bank Statistical Yearbook 2017, Barclays Africa Financial Markets Index. Note: Individual category totals (LHS) provide rankings for GDP growth, growth and export market share, debt profile, MPC outcomes transparency, living standards, quality of banks, macro data standards and budget release. The harmonised score (RHS) represents the average of all categories’ indicators, and is used to compile the total scores for Pillars 1-6. More information on p.34.



uncertainty and potentially damaging economic shocks. Kenya scores highest for transparency of monetary policy committee decisions and release of budgetary data, while Ivory Coast scores the lowest.

Importance of transparency

The importance of such transparency continues to grow as African countries become more dependent on domestic demand for economic growth.

Despite commodity exports remaining dominant across the continent as a whole, the role of consumption and investment has increased steadily over recent years. With a growing consumer demand in many countries, clear reporting of domestic macro data is an important consideration for foreign investors seeking to invest into such markets.

Demographics are highly favourable, indicating an ever-increasing role for domestic demand in driving the economy: Africa has the fastest growing population of any continent and is already home to more than 1.2bn people. This means that Africa may become a great source of additional labour supply for demographically beset countries in Europe over the next 50 years.

Youngest population

Africa has one of the youngest populations, with a median age of just 15 years old, against a global average of 30 and a European average of more than 40. This contributes to Africa’s high dependency ratio (the ratio of dependents to working-age population), but as these children move into working age, the African continent could experience a demographic dividend leading to higher GDP growth figures.

Although remaining relatively small on a per capita basis, the aggregate demand for consumer goods and services is expected to increase significantly, creating new investment and trade opportunities.

This could support an increase in domestic consumer spending to $2.2tn in 2030 according to some estimates, up from $680bn in 2008. In 2016 private and government consumption (mainly public infrastructure investment) Source: World Bank MEC database, Barclays Africa Financial Markets Index

Figure 5.4: Improving competitiveness boosts merchandise trade market share for most countries Export share, 5-year growth in market share value, %, and export market share, %, 2015

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-100

-50

0

50

100

150

200

Sout

h Af

rica

Nig

eria

Mor

occo

Egyp

t

Zam

bia

Ghan

a

Ivor

y Co

ast

Moz

ambi

que

Keny

a

Bots

wan

a

Mau

ritiu

s

Ethi

opia

Tanz

ania

Nam

ibia

Ugan

da

Seyc

helle

s

Rwan

da

Export market share (RHS) Export share growth

accounted for more than 60% of GDP growth across Africa (see Figure 5.3).

Taking into account economic performance, financial risks and macro transparency, South Africa, Nigeria, Namibia, Uganda, Morocco and Kenya have the highest scores in Pillar 5, while Ivory Coast, Zambia and Ethiopia have the lowest scores (see Figure 5.2).

As the analysis in Pillar 6 makes clear, legal certainty around enforceability

of financial contracts plays an equally important role in attracting foreign investment.

Enforceability of collateral positions, the existence of insolvency frameworks and commitment to international financial market master agreements all influence the development of financial markets generally. These issues provide a valuable complement to macroeconomic policies.

Figure 5.3: Consumption and investment play a significant role in GDP growthDrivers of growth by economic sector, Africa as a whole, %

-90-70-50-30-101030507090

110

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

( e)

2017

(p)

2018

(p)

Cont

ribut

ion

to g

row

th (%

)

Inventories Private consumption Government consumptionGross fixed investment External trade

30

Source: OECD, OMFIF analysis


32

Investors globally have sought higher returns than those offered in low-

yielding developed markets by expanding into new locations and accessing a growing range of assets. African financial markets stand to benefit from this trend, but long-term success depends on improving legal and regulatory certainty and boosting market transparency. Pillar 6 assesses the enforceability of collateral and netting and set-off positions across countries, the strength of insolvency frameworks, and the adoption of standard financial markets agreements. This includes the International Swaps and Derivatives Association Master Agreement, the Global Master Repurchase Agreement and the Global Master Securities Lending Agreement.

Commitment to international standard agreements

The ISDA master agreement is designed to enable over the counter derivatives to be documented fully and flexibly, as well as to ensure that collateral and netting and set-off positions are enforced, reducing the credit and legal risk for market participants. Similarly, the GMRA and GMSLA are global agreements governing cross-border repos and securities lending, which are vital to money market and other operations.

South Africa is the only country of the 17 where both netting and set-off and collateral positions are enforced, and the ISDA master capital agreements are widely recognised and implemented. Mauritius ranks second in the index, scoring 93 out of 100, losing some points owing to the limited recognition

of GMSLA and a relatively weaker insolvency framework than that in South Africa (see Figure 6.1).

Kenya, Rwanda, Zambia, Botswana and Ghana generally score well, based on their enforcement of netting and collateral positions.

The lower-scoring countries Ivory Coast, Egypt, Ethiopia and Morocco lack sufficient recognition of the use of the various master agreements assessed. OMFIF and Barclays assume that, as a result of the lack of recognised international standards, their financial markets are subject to their ‘own non-standard’ agreements developed in their jurisdiction, and may face challenges in

compatibility with international market participants which abide by the international standard procedures (see Figure 6.3). This reduces these countries’ overall score within the index.

Insolvency frameworks

The strength of insolvency frameworks, a World Bank measure within the annual Ease of Doing Business report, analyses the time, cost, and outcome of insolvency proceedings for domestic companies and also the strength of their legal framework for liquidation and re-organising proceedings. South Africa and Rwanda score the highest in this indicator, due

Agreements necessary to tackle investor uncertainty

Figure 6.1: Mauritius second to South Africa in financial rulesPillar 6 breakdown: Ranking of individual categories, max = 400 (LHS) Harmonised score, max = 100 (RHS)

0102030405060708090100

0

50

100

150

200

250

300

350

400

Sout

h Af

rica

Mau

ritiu

s

Keny

a

Rwan

da

Zam

bia

Bots

wan

a

Ghan

a

Nam

ibia

Tanz

ania

Nig

eria

Moz

ambi

que

Seyc

helle

s

Ugan

da

Ivor

y Co

ast

Egyp

t

Ethi

opia

Mor

occo

Netting position enforcement Collateral position enforcementStandard master financial agreements Insolvency frameworkPillar 6 Harmonised score (RHS)

Strengthening the legality and enforceability of rules in financial markets can help attract investors by reducing counterparty risk. The market’s operational infrastructure and performance will improve over time.

PILLAR 6: LEGALITY AND ENFORCEABILITY OF STANDARD FINANCIAL MARKETS MASTER AGREEMENTS

Source: World Bank Ease of Doing Business, Barclays-OMFIF analysis. Note: Individual category totals (LHS) provide rankings for netting and collateral position enforcement, standard master financial agreements and insolvency framework. The harmonised score (RHS) represents the average of all categories’ indicators, and is used to compile the total scores for Pillars 1-6. More information on p.34.

33

Figure 6.2: Enforceability of netting and collateral positions

Morocco

GhanaIvoryCoast

Nigeria

Egypt

Ethiopia

KenyaUganda

Rwanda

Tanzania

Zambia

Namibia

Botswana

South Africa

Mozambique

Mauritius

Seychelles

Netting and Collateral position enforced

Neither position enforced

ISDA GMRA GMSLA

Figure 6.3: Key financial masters agreements

Source: Barclays, OMFIF survey. Note: Own non-standard master’s agreement used assumed when there is strictly insufficient recognition of the standard agreement perceived.

South Africa Well recognised Well recognised Well recognisedMauritius Well recognised Well recognised Limited useKenya Well recognised Limited use -Rwanda - - -Zambia Well recognised Limited use - Botswana Well recognised Limited use - Ghana Well recognised Limited use - Namibia Well recognised Well recognised Well recognisedTanzania Well recognised Limited use - Nigeria Well recognised Well recognised Well recognisedMozambique Limited use - - Seychelles Limited use - - Uganda Well recognised Limited use - Ivory Coast - - - Egypt - - - Ethiopia - - -Morocco - - -

to the ability of creditors to recover large parts of their investment in the case of insolvency. They also have rules to discourage lenders from issuing high-risk loans and managers and shareholders from taking imprudent loans or otherwise pursuing harmful financial practices.

Ghana’s insolvency framework is the weakest in the index. Despite adhering to international standard master agreements, with the exception of GMSLA, and enforcing netting and collateral positions, it fails adequately to resolve insolvency without incurring high recovery costs for creditors. On average the payment recovery rate is 23 cents on the dollar, 12 cents below that of South Africa.

Most countries need to improve their adherence to international standards of financial agreements. The managing director of a global bank with operations across Africa explains, ‘With regulations, keep it simple: just follow the international norm.’ While some countries fare well on this measure, the underdevelopment of other African countries holds back the region’s ability to expand markets through establishing regional bourses or encouraging cross-border investment. Inconsistent regulations and uneven enforcement are a major handicap for growth. If investors lack confidence in a country’s regulatory and legal framework they will not deploy capital in the market.

“Active regulation and enforcement of existing

rules is needed. Regulators need to be flexible in dealing with the changing financial landscape. Incentives should

be available for creating new financial products as

well as developing existing instruments.”

Analyst, securities firm, Nigeria

ISDA Master Agreement Governs OTC derivatives transactions. The agreement makes transaction netting and close-out easier, allowing for better compatibility between different standards in various jurisdictions.

Global Master Repurchase AgreementDesigned for short-term repos of fixed-income European government bonds that take the form of repurchase agreements between principals under the law of England and Wales.

Global Master Securities Lending AgreementThe GMSLA underpins securities lending arrangements, allowing an agent lender to operate and take responsibility on behalf of a lender, in its activity with borrowers.

Source: Barclays, OMFIF survey.


34 METHODOLOGY

The Africa Financial Markets Index in focus Using a variety of parameters, both qualitative and quantitative, the Africa Financial Markets Index records the openness and attractiveness of countries across the continent to foreign investment. The index countries are scored on a scale of 10-100 based on six fundamental pillars comprised of over 40 indicators, covering market depth, openness, transparency, legal environment and macro opportunity.

Pillar 1: Market depthPRODUCT DIVERSITY• Type of assets available• Currency availability of stock exchange products• Number of hedging products available

SIZE OF MARKET• Total sovereign and corporate bonds, market capitalisation, ratio to GDP

LIQUIDITY• Total turnover of bonds and equities, ratio to market capitalisation and bonds outstanding

DEPTH• Ability to clear government instruments denominated in local currency in international markets• Existence of secondary market makers (bond market)• Closing auction for fair tradeable market prices

PRIMARY DEALER SYSTEM• Existence of system• Size of repo market

Pillar 2: Access to foreign exchangeNET PORTFOLIO FLOWS, RATIO TO RESERVES• Total net portfolio flows, ratio to foreign exchange reserves

FOREIGN EXCHANGE LIQUIDITY• Interbank market foreign exchange turnover

CAPITAL RESTRICTIONS• Foreign exchange capital controls

OFFICIAL EXCHANGE RATE REPORTING• Quality of data and frequency of publication

• Existence of multiple or unified exchange rate

Pillar 3: Market transparency, tax and regulatory environmentFINANCIAL STABILITY REGULATION• Basel accords implementation stage

QUALITY OF FINANCIAL REPORTING

• Commitment to international accounting and reporting standards (GAAP, IFRS)

TAX ENVIRONMENT• Existence of withholding taxes, special taxes and tax treaties

• Time taken to rebate withholding taxes on investments

FINANCIAL INFORMATION AVAILABILITY• Existence of fixed dates and times for market reporting• Publishing of data on sector and domestic vs non-resident ownership of domestic assets

MARKET DEVELOPMENT• Existence and effectiveness of Capital Markets Association• Existence and strength of rules protecting minority

shareholders

• Existence of sovereign rating (Fitch, Moody’s, S&P)

• Number of corporate ratings issued (Fitch, Moody’s, S&P)

Pillar 4: Capacity of local investorsLOCAL INVESTOR ASSET CONCENTRATION• Value of pension assets per capita

• Pension and insurance fund assets, ratio to total market

capitalisation of equities and bonds listed on exchanges

Pillar 5: Macroeconomic opportunityGDP GROWTH• Composite five-year historical GDP average (2011-16) and

five-year forecast (2017-22)

LIVING STANDARDS• GDP per capita

COMPETITIVENESS• Absolute export market share and growth in export market

share over past five years

MACROECONOMIC DATA STANDARDS• Availability and frequency of GDP, inflation and interest rate

data

BUDGET RELEASE• Regular release of budget

35

Pillar 5 cont.MPC OUTCOMES TRANSPARENCY• Frequency and regular publishing of MPC decisions and

meeting schedules

DEBT PROFILE• External debt-to-GDP

QUALITY OF BANKING SECTOR ASSETS• Non-performing loans ratio


NETTING AND COLLATERAL POSITIONS • Enforced netting and collateral positions

USE OF FINANCIAL MARKET MASTER AGREEMENTS • Use of ISDA master agreements, GMRA, GMSLA or own non-standard agreements

INSOLVENCY FRAMEWORK • Strength of insolvency frameworks, World Bank score

Methodology

Pillars and indicators

The index scores each country based on six pillars: market depth; access to foreign exchange; market transparency, tax and regulatory environment; capacity of local investors; underlying macro opportunity; and the legality and enforceability of standard master financial agreements. Pillars are built from a set of key indicators listed on page 34.

Each individual indicator is weighted equally in each pillar, and each pillar is weighted equally in the overall index score.

Data and survey

The data informing the scores for each pillar and their indicators stem from a mixture of quantitative and qualitative analysis. The quantitative data collected are of the latest year available, 2016 or 2015 figures. In cases where the data refer to current conditions, such as for the Basel implementation stages, international accounting standards, and credit ratings, the data are as of mid-September 2017.

The survey element provides both quantitative and qualitative data relating to legal, regulatory and market conditions in each of the countries, such as information on tax environment, as well as responses based on country experiences.

The survey was conducted between July and September 2017, covering 60 institutions operating throughout Africa. Participants include chief executives, managing directors, managing partners or country experts across a range of

global, regional and local institutions, including banks, securities exchanges, regulators, asset managers and investors.

Harmonisation and scoring

Raw data are harmonised on a scale of 10-100 to allow comparability between indicators.

Outliers in the raw data falling above or below two standard deviations of the mean are accounted for during the scoring. In the case of an outlier greater than the upper-bound, its value is replaced by the next-highest data point in the sample. This means indicators can have more than one country scoring maximum points.

In the rare case of missing data, data points are modelled to smooth gaps and ensure the overall pillar score is not affected. The proxy value takes the average of the remaining harmonised scores for the country across all its indicators in the pillar, ensuring the final pillar score is not skewed by a missing value.

The scoring of each indicator and pillar works under the same process. Once indicators have a harmonised score, the average is taken across each indicator in a pillar to create the overall pillar score. Similarly pillar scores are averaged to create the country’s composite score.

How to get full marks

As the index is a comparison of a country’s financial market against the selected sample, a country can reach the maximum score of 100. In such a scenario, the country must achieve the maximum score of 100 in all six pillars.


Official Monetary and Financial Institutions Forum

30 Crown Place, London, EC2A 4EB United KingdomT: +44 (0)20 3008 5262 F: +44 (0)20 7965 4489www.omfif.org @OMFIF


15 Troye Street, Johannesburg, 2001 South AfricaT: +27 (0) 11 350 4000www.barclaysafrica.com @BarclaysAfrica

Barclays Africa Group Limited is not affiliated with Barclays PLC

Documents

Africa Financial Markets Index 2017 · Exchange and is one of Africa’s largest diversified financial services groups. Barclays Africa Group offers an integrated set of products