Absa Africa Financial Markets Index 2019 Taking you further into Africa than ever before.

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Absa_financial_market_index_2019_live file.indd 1 07/10/2019 09:40 The Absa Africa Financial Markets Absa Group Limited (‘Absa Group’) is listed on the Johannesburg Stock Index was produced by OMFIF in Exchange and is one of Africa’s largest diversified financial services groups. association with Absa Group Limited. The scores on p.7 and elsewhere Absa Group offers an integrated set of products and services across record the total result (max=100) of personal and business banking, corporate and investment banking, wealth assessments across Pillars 1-6. For and investment management and insurance. methodology see individual Pillar Absa Group has a presence in 12 countries in Africa, with approximately assessments and p.38-39. 42,000 employees.

OMFIF conducted extensive The Group’s registered head office is in Johannesburg, South Africa, and quantitative research and data it owns majority stakes in banks in Botswana, Ghana, Kenya, Mauritius, analysis. Qualitative survey data were Mozambique, Seychelles, South Africa (Absa Bank), Tanzania (Barclays Bank collected and analysed by OMFIF with Tanzania and National Bank of Commerce), Uganda and Zambia. The Group input from Absa. also has representative offices in Namibia and Nigeria, as well as insurance operations in Botswana, Kenya, Mozambique, South Africa, Tanzania and © 2019 The Absa Group Limited and Zambia. OMFIF Ltd. All Rights Reserved. For further information about Absa Group Limited, please visit www.absa.africa Absa CIB Marketing and Communications team The Official Monetary and Financial Institutions Forum is an independent Fiona Kigen, Vice President - think tank for central banking, economic policy and public investment – a Marketing, Nkululeko Tjelake, non-lobbying network for best practice in worldwide public-private sector Assistant Vice President - Marketing, exchanges. At its heart are Global Public Investors – central banks, sovereign Sizwekazi Mdingi, Head of Integrated funds and public pension funds – with investable assets of $37.8tn, Communications, Andile Mkholwa, Vice President - External Communications, equivalent to 43% of world GDP. With offices in both London and Singapore, OMFIF focuses on global policy and investment themes – particularly in Kirsty van der Nest, Vice President - Stakeholder Relations. asset management, capital markets and financial supervision/regulation – relating to central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher standards, invigorating exchanges OMFIF Editorial, Meetings between the public and private sectors and a better understanding of the and Marketing team world economy, in an atmosphere of mutual trust.

Simon Hadley, Director, Production, For further information about OMFIF, please visit www.omfif.org Julian Frazer, Senior Editor, William Coningsby-Brown, Assistant Production Editor, Julie Levy- Abegnoli, Subeditor, Stefan Berci, Communications Manager, James Fitzgerald, Marketing Manager, Marcin Stepan, Head of Programming, Ben Rands, Head of Logistics, Sofia Melis, Head of Client Relationships.

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Absa_financial_market_index_2019_live file.indd 2 07/10/2019 09:40 Contents

Forewords 4-5 Pillar 4: Introduction 6-7 Capacity of local Executive summary 8-11 investors Contains country comparisons and highlights opportunities and challenges for the region’s Examines the size of local fi nancial markets. investors, assessing the level of local demand against supply Acknowledgments 11 of assets available in each market. Highlights 12-13 p. 26-29

Pillar 1: Market depth Pillar 5: Examines size, liquidity and Macroeconomic diversity of products in opportunity markets, as well as countries’ efforts to merge exchanges Evaluates economic and launch new markets. performance, fi nancial risks and fi nancial transparency, p. 14-17 demonstrated by availability of data, open monetary policy p. 30-33 communication and the timely release of state budgets.

Pillar 2: Access to foreign Pillar 6: Legality and exchange enforceability of standard Looks at factors that impact fi nancial markets markets’ accessibility to master agreements international investors, including the severity of Measures how well countries capital controls, exchange rate have adopted internationally p. 18-21 reporting standards and levels accepted legal standards, of foreign exchange liquidity. the enforcement of netting p. 34-37 and collateral positions, and insolvency regime adequacy.

Pillar 3: Indicators and Methodology p. 38-39 Market transparency, tax and regulatory environment

Assesses countries’ regulatory and tax environments for fi nancial markets, as well as transparency and enforcement p. 22-25 of accounting rules.

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Absa_financial_market_index_2019_live file.indd 3 07/10/2019 09:41 FOREWORDS

Benefiting the people behind the numbers

Peter Matlare Deputy Chief Executive Officer, Absa Group

Christine Lagarde, as managing director of the International Monetary Fund, once said, ‘We cannot just look at a country by looking at charts, graphs, and modelling the economy. Behind the numbers, there are people.’ This sentiment is reflected in the Absa Africa Financial Markets Index. This report is published against the backdrop of people’s growing disillusionment across the African continent with their individual and collective socioeconomic and political prospects. Accelerated economic development, underpinned by strengthening Aim of index economic resilience and building robust institutions, is key to realising the aspirations of our fellow Africans. African economies are The deepening and widening of financial markets are crucial steps towards national economic self- undergoing a signifi cant sufficiency. To reach the next level of growth, Africa requires a collective commitment to ensuring the period of transition and transnational cross-pollination of ideas. This index appraisal, with growing suggests we are making headway. The continent’s challenges are clearly visible, and its countries are foreign investment crafting actionable solutions. interest and much The report assesses progress and potential across six key pillars: market depth, access to foreign exchange, examination of the market transparency, the capacity of local investors, macroeconomic opportunity, and the legality and continent’s potential enforceability of standard financial markets master for mobilising local agreements. resources. Now in its Most promisingly, it highlights positive developments in market infrastructure and the fostering of market third year, the index has growth. Foreign exchange liquidity is improving, while market transparency and financial inclusion have become a benchmark been prioritised. Many countries have set ambitious for the investment strategies for national economic and financial market transformation. community and Africa As a leading African banking group, Absa is committed generally to gauge to furthering the development and prosperity of the continent and its people. We trust that the insights countries’ performance embodied in the index will inspire active engagement among policy-makers and market participants, and highlight how they resulting in measurable actions that foster inclusive can learn from others. growth and sustainable development to benefit the people ‘behind the numbers’.

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Absa_financial_market_index_2019_live file.indd 4 07/10/2019 09:41 Nurturing Financial the growth markets can of African help more businesses Africans

Ludger Schuknecht Jingdong Hua Deputy Secretary General, Vice-President and Treasurer, Organisation for Economic Co-operation and Development World Bank

Private sector development is key for growth on the Africa’s economic successes have often been African continent. A strong and dynamic private sector supported by financial market development, which can unlock jobs and opportunities for better lives, and in turn has been supported by improved economic is therefore instrumental in attaining development management and better institutions. This year’s objectives. Fortunately, the international community Absa Africa Financial Markets Index highlights some is paying increasing attention to the important role of important achievements on the continent, but also the private sector as a motor of progress. the large variation across countries and the major In 2017 in Hamburg, G20 countries agreed that it was opportunities yet to be marshalled. time to grant the private sector a central place in their Although financial investments are becoming co-operation with Africa. The G20 Compact with Africa increasingly international, their currency denomination was established in partnership with international should become increasingly local to match projects’ organisations and African countries to strive towards risk profiles. Because currency depreciations often a more enabling environment for private investment. follow economic shocks, foreign currency borrowers African members committed to implement reforms with local currency earnings are simultaneously in their macro, business and financing frameworks to burdened by economic hardship and increasing debt facilitate investment. G20 countries and international organisations committed to enhance and better service obligations. Infrastructure projects, non- coordinate their efforts, and encourage their exporting firms and small or medium-sized firms businesses to step up their activities in the region. all need local currency financing to manage risks. This is a novel approach and an opportunity to which Emerging markets have gradually been able to develop 12 African countries subscribed, and much progress both local investor bases and tap international has already been made. investors for local currencies; Africa must continue this trend. Financial markets in countries’ own currencies Nurturing the growth of African businesses requires will help African businesses, infrastructure borrowers, an open and enabling investment environment as well homeowners and microentrepreneurs gain access to as access to finance. It is encouraging, therefore, to the finance they need. see Compact and other African countries working on both these fronts, together with international partners The World Bank has a long history of supporting the and organisations. The third edition of the Absa development of local currency financial markets. We Africa Financial Markets Index shows that, across the help governments design, finance and implement continent, countries are making remarkable steps to investment projects and hold billions in local currency- develop and enhance their capital markets. denominated loans. We share knowledge globally By tracking progress on financial market on economic and financial markets policies and developments, this OMFIF-Absa report is a valuable regulations. The World Bank is committed to finding part of the monitoring and reporting of exciting new and innovative local currency financing solutions, progress in Africa. It helps us know where things because African nations need more options to borrow are moving, and who is open for business. We in the in their own currencies. international community look forward to further Local currency market development relies on many progress in the months and years ahead. fundamentals captured by this index. It is my hope that readers will explore the many opportunities we have to improve the local mobilisation of finance and to develop investable projects. We must all help Africa create local markets that combine these forces to develop well-functioning financial markets and enhance economic development to benefit all Africans.

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Absa_financial_market_index_2019_live file.indd 5 07/10/2019 09:41 Individual steps show collective progress

Despite disparities in individual standing, fi nancial market developments in countries covered by the Absa Africa Financial Markets Index show a collective progression towards a more robust, investment-supporting environment. Key mergers, new regulations and innovative fi nancial products have contributed to the expansion of fi nancial markets across the region. Policies that incentivise market activity and attract new players, such as favourable tax regimes and internationally aligned contractual frameworks, have boosted country scores. When the index was fi rst launched in 2017, the average mark for 17 countries was 49.6 out of 100 and only three scored above it, indicating much room for growth. Since then, the index has been expanded to include three additional countries, and the average overall score across all 20 has climbed to 52.7. The Seychelles progressed the most since the fi rst edition of the index. Its score climbed to 47 from 29, partly owing to its growing pool of local assets. In this edition, nine countries perform above average, showing that progress is becoming more evenly distributed across the index: South Africa, Mauritius, Kenya, Namibia, Botswana, Nigeria, Tanzania, Zambia and Rwanda. In the face of changing global conditions and domestic challenges for each market, this improvement shows that the region is moving in the right direction. The countries whose scores increased most since last year are Mauritius, Tanzania, Egypt, Namibia and Mozambique. Market depth improved in Mauritius following a substantial listing of bonds by the central bank. Enhanced export performance improved Egypt’s macroeconomic environment. Some markets remain hampered by the allure of the international bond market, a cheaper way for their governments to raise money but a barrier to the deepening of local markets and developing reliable yield curves. The outlook for Ethiopia, one of the lowest scoring countries, has improved following plans to launch a stock exchange in 2020, which may list the shares of telecoms companies it is planning to privatise.

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Absa_financial_market_index_2019_live file.indd 6 07/10/2019 09:41 INTRODUCTION

Rank Score 2019 2018 2019 2018 Comments

1 1 South Africa 88 93 Deep market liquidity anchored by strong domestic investors

2 4 Mauritius 75 62 Sizeable pool of investible pension assets with strong legal framework

3 3 Kenya 65 65 Sovereign bond listings enhance asset pool

4 6 Namibia 65 57 Wide range of fi nancial products available but low market turnover

5 2 Botswana 64 65 Drop in pension assets reduces local investor capacity

6 5 Nigeria 63 61 Multiple exchange rate reporting weakens robust performance across pillars

7 15 Tanzania 55 43 Strong investment environment but markets still small and illiquid

8 8 Zambia 55 53 Improving regulatory and legal frameworks but weak capacity of local investors

9 11 Rwanda 53 49 High transparency and fi nancial reporting standards

10 10 Uganda 52 50 Active foreign exchange market and high level of foreign reserves

11 16 Egypt 51 42 Strong macroeconomic outlook and high transparency

12 9 Morocco 51 50 High growth in export market share and strong insolvency regime

13 7 Ghana 50 55 Attractive tax environment but low wholesale foreign exchange market turnover

14 12 Seychelles 47 45 Small and illiquid equity market

15 18 Mozambique 44 36 Low securities turnover and high level of external debt

16 13 Ivory Coast 41 44 Fragmented bond market hinders yield curve development

17 19 Angola 36 34 Shallow markets but improving regulatory environment

18 14 Senegal 35 44 Fast-growing economy but small pool of local assets available for investment

19 17 Cameroon 35 41 Weak domestic investor capacity

20 20 Ethiopia 27 26 Rapid economic growth but still lacking fi nancial markets infrastructure

Score across all pillars, max = 100.

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Absa_financial_market_index_2019_live file.indd 7 07/10/2019 09:41 EXECUTIVE SUMMARY Morocco (51)

South Africa retains top position, other countries catching up 38 48 56 66 72 27

The Absa Africa Financial Markets Index evaluates financial market development in 20 countries, and highlights economies with the clearest growth prospects. The aim is to show not just present positions but also how economies can improve Senegal (35) 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 40 35 43 12 53 29 frameworks. In addition to quantitative analysis, OMFIF gained additional insights by surveying over 40 policy-makers and top executives from financial institutions operating across the 20 countries, Ivory Coast (41) including banks, investors, securities exchanges, central banks, regulators, audit and accounting firms and international financial and development institutions.

Continued on p.10 >> 38 51 67 14 51 26

Overall pillar scores max = 100

Pillar 1: Pillar 2: Pillar 3: Pillar 4: Pillar 5: Market Access to foreign Market transparency, Capacity of Macroeconomic depth exchange tax and regulatory local investors opportunity environment South Africa 100 South Africa 78 South Africa 96 South Africa 83 Egypt 76 Nigeria 70 Egypt 77 Mauritius 86 Mauritius 76 South Africa 74 Mauritius 67 Uganda 71 Nigeria 86 Morocco 66 Morocco 72 Botswana 55 Rwanda 66 Rwanda 85 Namibia 66 Botswana 70 Kenya 55 Kenya 65 Ghana 85 Seychelles 57 Uganda 69 Namibia 52 Botswana 64 Botswana 77 Botswana 54 Namibia 67 Ghana 50 Seychelles 64 Zambia 75 Nigeria 46 Kenya 67 Zambia 46 Zambia 61 Tanzania 74 Kenya 39 Mauritius 66 Egypt 45 Tanzania 60 Uganda 73 Ghana 22 Rwanda 63 Uganda 45 Mauritius 57 Namibia 72 Tanzania 22 Nigeria 60 Mozambique 41 Ivory Coast 51 Kenya 71 Angola 21 Ghana 59 Senegal 40 Morocco 48 Egypt 68 Cameroon 20 Ethiopia 59 Morocco 38 Namibia 45 Ivory Coast 67 Egypt 18 Seychelles 58 Ivory Coast 38 Mozambique 45 Angola 57 Mozambique 17 Cameroon 57 Angola 37 Cameroon 36 Mozambique 56 Uganda 16 Tanzania 54 Tanzania 34 Senegal 35 Morocco 56 Rwanda 16 Mozambique 54 Rwanda 31 Ghana 31 Seychelles 45 Ivory Coast 14 Senegal 53 Cameroon 28 Nigeria 31 Senegal 43 Zambia 13 Ivory Coast 51 Seychelles 24 Ethiopia 30 Cameroon 39 Senegal 12 Zambia 51 Ethiopia 11 Angola 29 Ethiopia 31 Ethiopia 10 Angola 49

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Absa_financial_market_index_2019_live file.indd 8 07/10/2019 09:41 Key Egypt (51)

Pillar 1 Market depth Pillar 2 Access to foreign exchange Pillar 3 Market transparency, tax and regulatory environment 45 77 68 18 76 24 Pillar 4 Capacity of local investors Pillar 5 Macroeconomic opportunity Pillar 6 Legality and enforceability of standard Ethiopia (27) fi nancial markets master agreements (xx) = overall score

Nigeria (63) 11 30 31 10 59 20

Ghana (50)

70 31 86 46 60 87 Kenya (65) Rwanda (53) Cameroon (35)

50 31 85 22 59 55 Uganda (52)

55 65 71 39 67 96 31 66 85 16 63 57 28 36 39 20 57 26 Seychelles (47) 45 71 73 16 69 35 Pillar 6: Legality and enforceability Angola (36) of standard fi nancial Tanzania (55) markets master agreements Zambia (55)

Mauritius 98 24 64 45 57 58 31 Kenya 96 South Africa 95 Namibia 90 37 29 57 21 49 26 34 60 74 22 54 88 Tanzania 88 46 61 75 13 51 81 Nigeria 87 Mozambique (44) Zambia 81 Botswana (64) Botswana 62 Namibia (65) Rwanda 57 Ghana 55 Mozambique 52 Uganda 35 41 45 56 17 54 52

Seychelles 31 55 64 77 54 70 62 Senegal 29 52 45 72 66 67 90 Morocco 27 Mauritius (75) South Africa (88) Angola 26 Cameroon 26 Ivory Coast 26 Egypt 24 Ethiopia 20 67 57 86 76 66 98 100 78 96 83 74 95 Absa Africa Financial Markets Index 2019 | 9

Absa_financial_market_index_2019_live file.indd 9 07/10/2019 09:41 The report finds that:

 South Africa tops the index largely potential for improvement in the Seychelles are considering enacting due to its sizeable lead in ‘market coming year. It has announced some form of netting legislation, depth’. While it is likely to remain plans to establish a stock exchange which would earn them higher marks an outlier in this pillar, the creation in 2020. Local banks and other in coming years. of new bourses and key mergers financial service firms are in the between existing ones will improve process of adopting international  ‘Access to foreign exchange’ is the standing of other countries in financial reporting standards. the only pillar where average scores coming years. This year, Botswana, fell. Aggregated reserves grew Kenya and Namibia join the ranks  Countries perform best modestly to $244bn from $233bn of countries that score over 50 in collectively in ‘market transparency, last year, but countries like Zambia Pillar 1, which also includes Nigeria, tax and regulatory environment’, and Angola are running low, leaving them potentially vulnerable to Mauritius and Ghana. Issuance of with 13 out of 20 scoring above the foreign exchange risk. There is also new debt with longer tenor has average mark of 67. Favourable tax high disparity in interbank foreign lengthened the yield curve in Ghana, regimes in different jurisdictions exchange turnover across countries. Nigeria and Tanzania. The creation incentivise market activity and South Africa’s turnover is 466% of of new products, such as green and the entry of new players. Survey GDP, but the index average without blue bonds, could enhance market respondents in Rwanda, Tanzania, it is only 13%. activity and attractiveness to Kenya, Ghana and South Africa gave positive feedback for their foreign investors in coming years.  Egypt’s strong performance Assigning primary dealers will respective tax systems. Uganda, in ‘macroeconomic opportunity’ help create a secondary market in Cameroon and Senegal have earned is driven by steady economic jurisdictions where none yet exist. international corporate credit and export growth, along with a ratings for the first time. decline in non-performing loans.  Other countries are catching up in It does well in macro reporting  the rest of the index. Egypt has the ‘Legality and enforceability of and transparency, topping Pillar 5 highest score in ‘macroeconomic standard financial markets master as it completed the International opportunity’ while Mauritius and agreements’ improved significantly, Monetary Fund’s reform programme Kenya claim the two top spots with the average score growing to earlier this year. in ‘legality and enforceability of 55 from 47 last year. Amendments standard financial markets master to insolvency laws and processes  The amount of pension assets agreements’. Ethiopia, although boost the scores of Kenya, Morocco varies greatly among countries lagging behind, has significant and Rwanda. Ghana, Morocco and the in the index. Mauritius leads with

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Absa_financial_market_index_2019_live file.indd 10 07/10/2019 09:41 Acknowledgements

The team consulted more than 40 policy-makers, regulators and $4,331 per capita, followed closely market practitioners across African fi nancial markets in writing this by South Africa, Namibia, Botswana report, whom we thank for their views and opinions. Although some and the Seychelles. Meanwhile, requested anonymity, we thank the following for their contribution: 11 countries have less than $100 pension fund assets for every person. Expanding the coverage Arnold Bagubwagye, Deputy Director, Bank of Uganda of pension schemes increases Sunil Benimadhu, Chief Executive, Stock Exchange of Mauritius the amount of investible assets José Miguel Cerdeira, Economist, Banco de Fomento Angola available, enhancing local investor Jacqueline Irving, Senior Sector Economist, Sector Economics and capacity. Because of limited Development Impact Department, International Finance Corporation, product availability, pension funds World Bank Group in some countries are constrained George Kwatia, Tax Partner, PricewaterhouseCoopers (Ghana) Limited to investing in sovereign securities. Vipin Mahabirsingh, Managing Director, Central Depository Building up pension fund assets & Settlement Co. Ltd., Mauritius through innovative and inclusive Moremi Marwa, Chief Executive, Dar es Salaam Stock Exchange Plc schemes can help spur demand for Prosscovia Nambatya, Corporate Finance Lawyer, Uganda a wider range of financial products Anica Nerlich, Financial Analyst, Global Macro and Market Research and lead to greater market activity. Department, International Finance Corporation, World Bank Group

 There have been significant Akiules Neto, Executive Director, Angolan Securities Exchange improvements for individual (BODIVA) countries since the index was first Birgit Reuter, Financial Offi cer, Global Macro and Market Research established in 2017. Since then, Department, IFC, World Bank Group countries have taken steps to align Isaac Sekitoleko, Senior Planning and Risk Offi cer, Capital Markets their local market infrastructure Authority, Uganda with global standards. Tracking Valentin Tchakounte, Managing Director, Nambi Capital these changes annually helps measure the gradual progress We also thank individuals from the following institutions: Deloitte, of Africa’s financial markets and Bank of Mauritius, Bank of Tanzania, Mauritius Commercial Bank provide guidance on how countries and MERJ Exchange. can advance further.

Report authors Kat Usita, Deputy Head of Research, OMFIF Chris Papadopoullos, Economist, OMFIF

With support from Jeff Gable, Chief Economist, Absa Group Limited George Asante, Head of Global Markets, Absa Regional Operations Garth Klintworth, Head of Global Markets, Absa Group Limited Danae Kyriakopoulou, Chief Economist and Director of Research, OMFIF Bhavin Patel, Senior Economist and Head of Fintech Research, OMFIF Di Wu, Research Assistant, OMFIF

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Absa_financial_market_index_2019_live file.indd 11 07/10/2019 09:41 Highlights 2018-19

The Seychelles issued the world’s Mauritius established a multi-commodity spot fi rst sovereign blue bond, an and derivatives trading instrument developed to fi nance platform and clearing sustainable marine and fi sheries house. projects. $1.5bn: South Africa’s Financial Cameroon’s Pooled assets Sector Conduct Authority under management published a draft conduct Douala Stock of Kenyan pension standard determining skills Exchange funds that formed and training requirements merged with for board members of the Kenya Pension pension funds. regional stock Fund Consortium to market Bourse invest in alternative The des Valeurs assets. Johannesburg Mobilières de l’Afrique Centrale. Ivory Coast is developing Stock Exchange an agricultural launched a commodities exchange to Nasdaq clearing be launched in 2020. platform for 400%: equity and Oversubscription of Mauritius currency Nigeria’s fi rst 30- launched an derivatives year government ebond trading bond issued earlier markets. and market this year. surveillance Namibia issued the system, a new fi rst green bond Zambia is introducing a electronic trading primary dealer system system for its from a commercial to boost the secondary bank in southern market for government government Africa. bonds. bonds.

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Absa_financial_market_index_2019_live file.indd 12 07/10/2019 09:41 Market developments and policy changes boost growth of fi nancial markets across the continent

The Bank of Mozambique Morocco is developing The Bank of Ghana approved its fi rst plans for an agricultural released an Interbank independent licensed commodities exchange, Forex Market Conduct broker, Amaramba Capital. Bourse des Matières to regulate and improve Premières Agricoles. trading practices.

Rwanda’s central The Dar es Salaam Stock Exchange has been made a bank shifted full member of the World Federation of Exchanges. to targeting infl ation between 2-8% 10x: Increase Angola expects through interest in banks’ its fi rst ever initial rates instead of minimum capital public offering this managing money requirements year, following supply. as proposed the privatisation by Egypt’s new of multiple state- banking bill, raising owned enterprises. Tanzania created a Tax it to $294m from Ombudsman Offi ce to $29.4m. handle disputes arising All local Ugandan banks from the administration of signed onto a GMRA and tax laws. Uganda reduced the market is now able to trade horizontal repos. withholding Ethiopia announced tax on 10-year Senegal began plans to launch a government bonds implementation of a hybrid stock exchange by Basel II and III banking 2020. to 10% from 20%. regulation framework.

Botswana formed a Financial Stability Council Morocco issued its fi rst sovereign sukuk, to coordinate between the Islamic bonds that are compliant with country’s various fi nancial sharia principles. authorities.

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Absa_financial_market_index_2019_live file.indd 13 07/10/2019 09:41 Pillar 1: Market depth

Serra da Leba, Angola 15.0711° S | 13.2486° E

Absa_financial_market_index_2019_live file.indd 14 07/10/2019 09:41 Making headway on market infrastructure

Countries are making progress on developing active secondary markets and reliable yield curves, but still have some way to go. New markets were created, enhancing product diversity and market size.

FigureFig ure1.1: 1.1: Large Financial disparities markets remain remain uneven in market in size and size level and of level activity of activity Scores for Pillar 1 categories, max=500; harmonised score, max=100 (RHS) Scores for Pillar 1 categories, max=500; harmonised score, max=100 (RHS)

500 100 450 90 400 80 350 70 300 60 250 50 200 40 150 30 100 20 50 10 0 0 Egypt Kenya Ghana Angola Nigeria Zambia Uganda Senegal Rwanda Namibia Ethiopia Morocco Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast Ivory South Africa South Mozambique

Product diversity Size of markets Liquidity Depth Primary dealer system Pillar 1 harmonised score (RHS)

Sources: National securities exchanges, national central banks, OMFIF analysis. Note: Category scores (LHS) provide the averageSources: of indicator National scores securities within each exchanges,category. The harmonised national centralscore (RHS) banks, represents OMFIF the average analysis. of all Note: Pillar 1 indicatorsCategory and is used scores to compile (LHS) the provide total scores the for average Pillars 1-6. of More indicator information scores on p.38-39. within each category. The harmonised score (RHS) represents the average of all Pillar 1 indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39.

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Absa_financial_market_index_2019_live file.indd 15 07/10/2019 09:41 South Africa receives the highest to renew their licence in 2019 due to currency yield curve. This is due partly Pillar 1 score again this year. Its stock falling revenues. Turnover has been to easy access to Eurobond markets, market capitalisation, the largest hit by uncertainty over Umeme, the where bonds come at cheaper nominal in the index, is triple the size of its country’s main electricity firm and interest rates and in some cases give economy. Botswana has the second- most-traded stock. Still, Uganda’s useful currency hedges. In the West largest market capitalisation at 204% overall performance in this pillar African Economic and Monetary Union of GDP, but finishes fifth in the pillar improves slightly, with the decline in (UEMOA), governments can offer due to lower secondary market activity. liquidity offset by the higher value of bonds through the central bank’s Most of Botswana’s listed companies listed bonds and equities. auction system and regional securities are dual-listed mining firms that trade exchange, preventing the formation of Morocco’s market capitalisation is 51% at low volumes on the local stock a yield curve and stunting secondary of the country’s GDP, and its equities exchange. Nigeria, Africa’s largest market growth. market is the fifth most active in the economy, has a small equity market at index, with turnover at 9% of market In October 2019, Egypt’s central 8% of GDP, but maintains second place size. Its score, however, is constrained bank introduced the Cairo Overnight due to its high level of activity and by the limited availability of financial Interbank Average benchmark to broad range of available products. products compared to other index deepen its money, derivatives and Mauritius’ score increases by 11 nations. capital markets. This will help price points, driven by the listing of Bank of a broad array of products, enhancing Egypt has a fairly liquid stock market Mauritius bonds with a value of $268m market liquidity. Angola is tapping with turnover at 26% of market at end-June 2019, raising the total reissuances of government bonds to capitalisation. There are no equities value of bonds listed on the exchange spur secondary market trading and listed on Angola’s exchange, and both by 27% compared with the same time boost the debt market’s size. Cameroon and Mozambique have last year. Namibia’s performance on market capitalisations of less than 5% Most index countries have a primary the pillar also improved due to a 17% of GDP. Ethiopia is the only country in dealer system in place for government rise in the value of its listed bonds, the index without a stock exchange, bonds, improving the efficiency of debt with contributions from the public although the government plans to issuance and reducing operational and private sector. Kenya earns points establish one in 2020. risk associated with counterparties. following a sharp climb in the value of However, the volume of ‘horizontal listed sovereign bonds and a 20% rise Enhancing market depth repos’ (short-term loans between in bond turnover in the 12 months to Survey respondents in several commercial banks) is low in nearly all June 2019. countries said the lack of a reliable markets except South Africa, Nigeria In contrast, Uganda’s market liquidity benchmark yield curve against which and Mauritius, where the average daily continued to drop, with $11m in to price various securities is hindering turnover in 2018 was $4.5bn, $290m turnover, down from $25m. A local the development of domestic capital and $55m, respectively. Uganda’s survey respondent said one of the markets. Governments have not central bank has approved reforms to market’s largest brokers decided not prioritised developing a credible local its primary dealer system to narrow the number of banks involved. It tried expanding primary dealership to all commercial banks in 2017, but found Figure 1.2: Product availability the secondary market had become fragmented. The Central Bank of Nigeria disrupted Equities Corporate bonds Government bonds FX swaps Currency futures Climate- aligned bonds Asset- backed securities Exchange- traded funds Options Angola          debt markets by barring local banks Botswana          from buying government bills at an Cameroon          Ivory Coast          open market auction in July 2019, to Egypt          encourage banks to lend more to the Ghana          private sector. Kenya          Mauritius          A lack of interest from international Morocco          Mozambique          investors stymies capital market Namibia          development in several countries. Nigeria          Rwanda          Some survey respondents said the Senegal          low interest in their country was due Seychelles          South Africa          to a lack of awareness, or a dearth of Tanzania          domestic investment opportunities. For Uganda          others, like South Africa, international Zambia          appetite has waned in the light of Ethiopia not included as does not have a securities exchange Sources: National securities exchanges, national central banks, OMFIF analysis credit ratings downgrades and political

16 | Absa Africa Financial Markets Index 2019

Absa_financial_market_index_2019_live file.indd 16 07/10/2019 09:41 uncertainty. Ghana is trying to reduce company and underpinned by ‘An efficient and liquid foreign investment in its government blockchain technology, the first public bond market provides debt. The country’s central bank and offering of its kind. finance ministry are discussing a cap some scope for effective Ghana is working on a ‘capital market on the amount of debt that can be transmission mechanism held by foreign investors, as a way to master plan’ for the next decade of reduce external vulnerabilities. development, though few details for monetary policy.’ are yet available. Legislation was Fostering market growth introduced to permit the listing of Maxwell Opoku-Afari, first It has become a more challenging real estate investment trusts on the deputy governor, Bank of environment for new listings in exchange. Mauritius has created a Ghana, June 2019 certain countries. Kenya’s interest new regulatory and tax framework to rate cap, introduced in 2016, has encourage development of Reits. hampered credit creation, weakening Merging and making markets companies’ financial bottom line and hindering their expansion plans, The past year has seen progress in negatively impacting their capital initiatives to launch new markets or issuance. The value of bonds listed merge existing ones, which should on the Nairobi exchange doubled to improve efficiency and liquidity. $17.5bn from $8.8bn over the year, Cameroon’s Douala Stock Exchange due entirely to sovereign issues. One merged with the Bourse des Valeurs survey respondent said the country’s Mobilières de l’Afrique Centrale to large government bond issuance in create a unified regional exchange in recent years has crowded out investor Central Africa. Cameroon’s regulator demand for private sector securities. has also joined forces with the Many countries plan to bolster their regional regulator, a move that survey market capitalisation. Kenya’s Capital respondents expect will add depth to Markets Authority wants to boost the financial market framework. the country’s venture capital and The West African Capital Markets private equity markets to create a Integration programme is an ongoing Figure 1.3: Market pipeline of smaller firms that can project that would closely align the size and liquidity pursue initial public offerings. The exchanges of Ghana, Nigeria, Sierra Capital Markets Authority of Uganda Leone, Cape Verde and the BRVM. It is developing mandatory listings for would allow brokers from each country firms in strategic sectors such as to trade directly on any of the others’ telecommunications, tier one banks and exchanges. The regional regulator is mining firms to increase the number also working to develop covered bonds, of listed companies on its bourse. The green and social bonds, and Reits. Casablanca Stock Exchange launched Market capitalisation, capitalisation, Market GDP % of equities, of turnover Total capitalisation market % of bonds and corporate sovereign Total $bn on exchanges, listed outstanding, in bond market, turnover Total % bonds outstanding a programme in 2016 to encourage Ethiopia plans to develop a secondary South Africa 292 33 342 190.9 listings of small and medium-sized market in government bonds, which Botswana 204 0 13 1.4 enterprises and expects the first such should create the basis for a broader Mauritius 72 4 3 1.3 IPOs to go ahead this year. securities exchange. Respondents Morocco 51 9 15 0.7 expect Ethiopia’s privatisation of Ethio Rwanda 35 0 4 0.2 The Bourse Régionale des Valeurs Senegal 33 4 2 5.1 Telecom will aid the formulation of a Mobilières, the UEMOA stock exchange, Kenya 25 6 35 17.5 introduced in 2017 its small-cap index stock market. Uganda 22 0 0 2.1 Seychelles 21 3 0 0.2 to help provide smaller firms with The Stock Exchange of Mauritius began Ivory Coast 19 4 2 5.1 capital before a listing on the main trading in commercial paper after Namibia 18 2 3 3.1 exchange, but still awaits its first the central bank finalised regulations Zambia 18 1 9 5.5 listing. Egypt’s market capitalisation for issuance and trading. There are Egypt 18 26 10 43.1 was lifted by the privatisation of a further plans to create a green bond Ghana 17 0 78 14.8 number of state-owned enterprises. market. Mauritius established a new Tanzania 14 1 5 4.1 Nigeria 9 6 66 58.3 The MERJ Exchange (formerly Trop-X) commodities and derivatives exchange Mozambique 4 0 3 1.0 in the Seychelles demutualised in to enhance its position as a wealth Cameroon 1 0 4 0.3 September and listed on its own and asset management destination. Ethiopia 0 0 0 0.0 market. It launched tokenised Similarly, Ghana’s commodity exchange Angola 0 0 37 7.5 has started operations, trading Sources: National stock exchanges, national central securities of its own stock – digital banks, World Federation of Exchanges, Thomson assets representing shares in a agricultural products. Reuters, OMFIF analysis

Absa Africa Financial Markets Index 2019 | 17

Absa_financial_market_index_2019_live file.indd 17 07/10/2019 09:41 Pillar 2: Access to foreign exchange

Chott El Jerid, Salt Lake, Tunisia 33.7782° N | 8.3965° E

Absa_financial_market_index_2019_live file.indd 18 07/10/2019 09:41 Rebuilding and reforming

Foreign exchange liquidity is improving in key index economies, while oil exporters appear to be recovering from past difficulties and strengthening foreign reserves.

FigureFig ure2.1: 2.1: South South Africa, Egypt Egypt and andUganda Uganda buoyed buoyedby foreign by exchange foreign liquidity exchange liquidity ScoresScores for Pillarfor Pillar 2 indicators, 2 indicators max=400;, max=400 ;harmonised harmonised score, score, max=100 max=100 (RHS) (RHS)

400 100

350 90 80 300 70 250 60 200 50

150 40 30 100 20 50 10 0 0 Egypt Kenya Ghana Angola Nigeria Zambia Uganda Senegal Rwanda Namibia Ethiopia Morocco Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast South Africa Mozambique

Net portfolio investment to reserves Interbank FX turnover FX capital controls Official exchange rate reporting standard Pillar 2 harmonised score (RHS)

Sources: International Monetary Fund, national central banks, OMFIF analysis. Note: The harmonised score (RHS) representsSources: the averageInternational of all Pillar Monetary 2 indicators Fund, and national is used to central compile banks, the total OMFIF scores analysis. for Pillars Note: 1-6. More The informationharmonised on p.38-39. score (RHS) represents the average of all Pillar 2 indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39.

Absa Africa Financial Markets Index 2019 | 19

Absa_financial_market_index_2019_live file.indd 19 07/10/2019 09:41 Pillar 2 examines factors that impact interbank market and is responsible for Africa’s interbank foreign exchange markets’ accessibility to international almost 60% of total activity. However, activity is still highest, with turnover investors. These include the existence the index score deliberately excludes equivalent to 466% of GDP. Mauritius is and severity of capital controls, central bank transactions to reflect second at 98%, followed by Uganda at exchange rate reporting standards and market activity only. 72%. Excluding South Africa, the index the level of foreign exchange liquidity. average is 13% of GDP. In 2016, Ghana loosened surrender This pillar also addresses the need and repatriation requirements for The FX Global Code, established in to manage volatility resulting from exporters, which partly explains 2017 through the efforts of central openness. This is measured by central the growth in its interbank foreign banks worldwide and the Bank for banks’ ability to meet demand for exchange market. The move has International Settlements, sets best currency, by looking at the ratio of net allowed more foreign currency to practice principles for the foreign portfolio flows to reserves. flow through the commercial banking exchange market. Market participants South Africa reclaims the top spot in system rather than being facilitated in South Africa, Kenya and Botswana this pillar after having been overtaken only by the central bank. The result are adopting the code, according to by Kenya in the previous edition of has been a steady increase in monthly survey responses. Only a few banks this index. High interbank foreign interbank foreign exchange turnover. in Mauritius have adopted the code. exchange turnover, regular exchange The BoG published the Ghana More are expected to follow suit, which rate reporting and a favourable reserve Interbank Forex Market Conduct, a set would improve the country’s standing level relative to net portfolio flows of guidelines for market participants, in coming years. all contribute to South Africa’s high to support further development. Reserves running low position. Kenya, meanwhile, drops South Africa has the most active Zambia suffers the largest drop in its in ranking after the International interbank foreign exchange market, score for portfolio reserves. These fell Monetary Fund reclassified its with annual turnover reaching $1.7tn to $1.6bn at the end of 2018 from a exchange rate regime to ‘other in 2018, considerably higher than other peak of just under $4bn in 2015. The managed arrangement’ from ‘floating’, index countries. Egypt and Mauritius 2018 figure is far below the generally a move the central bank contests. follow, each with foreign exchange accepted adequacy benchmark of three Boosting foreign exchange liquidity turnover greater than $10bn. Nigeria’s months’ imports cover. Reserves fell turnover rose by 38% to $7.8bn from slightly further over the first half of Ghana scores low in this pillar overall, $5.6bn the year before. On the other 2019. Zambia still pays interest on though its interbank foreign exchange hand, Ivory Coast, Senegal, Ethiopia, external debt, its mining production market has deepened in recent years. the Seychelles, Angola, Cameroon and has declined, and international Monthly average turnover in the Rwanda have negligible or no interbank investors have less appetite for interbank foreign exchange market foreign exchange turnover. Zambian assets. doubled to around $200m in 2018. The Bank of Ghana deals heavily in the Even relative to its economy, South Following the sharp fall in oil prices in 2014, Angola ran significant current account deficits. Its stock of reserves has since halved. It achieved a current Figure 2.2: Foreign exchange exposure uneven across countries account surplus in 2018 for the first Net portfolio investment to reserves, % time in five years, but its reserves 100 relative to its net portfolio investment 50 remain low, weighing on its pillar score. In contrast, Nigeria, the continent’s 40 other major oil exporter, has kept a tighter control over deficits and has 30 been running a current account surplus 20 since 2016. It has held successful Eurobond issuances and built up its 10 reserves back to more than $40bn.

0 Uganda performs strongly in this l t a a a a a a a o pillar, with almost the same score as

us ny top-ranked South Africa. It has a high nega Egypt Ke Ghan Angola Nigeri Zambia

Ugand level of foreign reserves relative to net Se Rwanda ychelles Namibi Ethiopi Morocc Tanzania Mauriti Botswan Cameroon Se portfolio investment flows and enough Ivory Coas South Africa Mozambique reserves to cover more than four Sources: International Monetary Fund, World Bank, national central banks, OMFIF analysis months of imports.

20 | Absa Africa Financial Markets Index 2019

Absa_financial_market_index_2019_live file.indd 20 07/10/2019 09:41 Mauritius has high net portfolio ‘In 2016, Ghana Fig 2.3: IMF classification of investment, but is less vulnerable to exchange rate regimes foreign exchange fluctuations. The loosened surrender significant inward flow is due to its and repatriation position as a favourable domicile for requirements for funds, often comprised of international money invested globally. exporters, which Floating The combined reserves of index partly explains The exchange rate is market- countries have climbed 9% over the the growth in its determined. The central bank rarely, last five years to $244bn. Nominally, if at all, intervenes to manage the the holders of the largest reserves are interbank foreign exchange rate. South Africa, Nigeria and Egypt, with exchange market. The Ghana South Africa 52% of the total. move has allowed Mauritius Tanzania Mixed year for floating rates more foreign currency Mozambique Uganda Few major changes in exchange rate to fl ow through the Nigeria Zambia regimes can be observed across index Seychelles countries each year. Nine have freely commercial banking floating regimes, while the rest are a system rather than mix of intermediate or fixed regimes. being facilitated only The IMF is urging Angola to move by the central bank.’ towards a freer exchange rate as Intermediate part of its bail-out after the country transitioned to a band system in The exchange rate floats within a early 2018. The kwanza has gradually pre-determined range, or the central depreciated and is now around half bank may intervene occasionally of its previously fixed value against in a managed float arrangement. Nigerian importers’ reliance on dollar the dollar. Angola’s central bank May also be referred to as a soft or transactions. stopped direct sales of foreign crawling peg. currency late last year. These will be Some countries are moving away Angola Kenya handled by authorised commercial from freer regimes. Early last year Egypt Morocco banks. According to local analysts, the IMF reclassified Kenya’s exchange Ethiopia Rwanda the policy has improved foreign rate regime to ‘other managed exchange liquidity and increased arrangement’ from ‘floating’. In its the volume of foreign exchange. The October 2018 Article IV economic kwanza’s depreciation and rebound health check, the Fund noted that in oil prices last year helped Angola the shilling was overvalued by around reduce its twin deficits. A rebuilding 18%. It was one of the best performing of its foreign reserves and possible African currencies over 2018 and Fixed reclassification of its exchange rate has been stable against the dollar, regime to ‘flexible’ from ‘intermediate’ The exchange rate is tied to another which climbed against most African could raise its Pillar 2 score in coming country’s currency or a composite currencies during the second half of years. of other currencies. May also be the year. The Central Bank of Kenya referred to as a hard peg. The central Nigeria has moved towards unifying disagreed with the IMF’s assessment, bank intervenes to maintain the its various exchange rates and allowed arguing it only intervenes in foreign exchange rate. its foreign exchange fixing rate (the exchange markets to counter volatility, rate at which it sells dollars to certain and that the lender exaggerated the Botswana Namibia local companies) to depreciate. This shilling’s overvaluation. Cameroon Senegal has brought it closer to the Nigerian Ivory Coast autonomous foreign exchange rate The reclassification pulls down Kenya’s fixing rate used by foreign bond and rank but its score is still among the stock investors. Last year it signed a highest in the pillar, as other indicators currency swap agreement with China, remain healthy. It has a large stock of its second largest trade partner, to foreign reserves, worth four months of Sources: International Monetary Fund, OMFIF analysis. Note: Kenya formally disagrees with the IMF’s definition of increase trade and ease pressure imports and 10 times its 2018 figure its currency regime. on the naira-dollar rate by reducing for net portfolio investment.

Absa Africa Financial Markets Index 2019 | 21

Absa_financial_market_index_2019_live file.indd 21 07/10/2019 09:53:14 Pillar 3: Market transparency, tax and regulatory environment

Pyramids of Meroe, Sudan 16.9380° N | 33.7489° E

Absa_financial_market_index_2019_live file.indd 22 07/10/2019 09:41 Mixed progress on international standards enforcement

Many countries are moving towards supportive tax systems. However, in several jurisdictions, transparent financial reporting is hindered by a lack of accounting and audit capacity, attitudes to transparency and enforcement problems.

FigureFig u3.1:re 3.1: South South Africa Africa l eleadsads on on tra ntransparencysparency and tax and env itaxronm environmentent ScoresSc orfores Pillar for P il3lar categories, 3 categorie max=800;s, max=80 0harmonised; harmonise dscore, score ,max=100 max=100 (RHS)(RHS)

800 100 700 90 80 600 70 500 60 400 50 300 40 30 200 20 100 10 0 0 l t t s s a a a a a a a a a o l ia ia i i s p y e c u d d on l g a p n b l n a n a n n que er ia o e g o i it i o c r e a n i o m b z a r n b i g Eg y K Co a G h A fr i c n u r am i e A n ch e N Z a y ts w Ug a m e S R w y N Et h M o T a e M a za m B o C a vo r S out h I S M o

Financial stability regulation Reporting and accounting standards Tax environment Financial information availability Market development Corporate action governance structure Protection of minority shareholders Existence of credit rating Pillar 3 harmonised score (RHS)

Source: Bank for International Settlements, International Financial Reporting Standards, Deloitte International Accounting StandardSour Plus,ce: WorldBank Bank for I Doingntern Business,ational S Standardettleme &n tPoor’s,s, Int eMoody’s,rnation Fitch,al Fin OMFIFancia lanalysis. Report Note:ing S Categorytandard sscores, (LHS) provideD etheloi averagette Inte ofrn indicatorational scoresAccou withinnting eachStan category.dard Plu Thes, W harmonisedorld Bank score Doin (RHS)g Bu srepresentsiness, St theand averageard & of all Pillar 3 indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39. Poor’s, Moody’s, Fitch, OMFIF analysis. Note: Category scores (LHS) provide the average of indicator scores within each category. The harmonised score (RHS) represents the average of all Pillar 3 indicators and is used to compile the total scores for PillaAbsars 1 Africa-6. M Financialore in Marketsforma Indextion 2019 | 23 on p.38-39.

Absa_financial_market_index_2019_live file.indd 23 07/10/2019 09:41 This pillar assesses countries’ Kenya’s tax code is generally from one of the low-scoring countries regulatory and tax environments for supportive, according to one local tax suggested that corporation tax financial markets. These factors play a professional. However, in an effort to discounts for listed companies would fundamental role in offering investors raise revenue, the government has promote further development. introduced prohibitive taxes, such incentives to invest in financial Mauritius, Nigeria and South Africa as an increased levy on mobile cash products. They provide transparency, score highest for tax overall. Nigeria transactions. Responses were positive which is vital for fostering investor has 14 ratified tax treaties and six for Tanzania and Rwanda, where low confidence. in the pipeline. ‘Nigeria’s tax system taxes on capital gains and interest has performed considerably well in Ghana scores highly, receiving a income boost scores for their tax encouraging and facilitating financial near-perfect score for its tax regime. environment. Financial market participants view market development,’ said a senior Tax systems in Angola and Botswana its tax system as broadly favourable member of a major accountancy are less friendly. Respondents to financial market development. firm. Mauritius earned similar praise, said their systems were generally Two respondents praised its although in fostering a tax system unsupportive of financial market straightforward tax code, as well as that encourages financial market growth. One financial institution development, it must avoid being exemptions on a variety of capital executive in Botswana said that seen as a tax haven by international market taxes such as capital gains planned improvements to the authorities. In 2018, it introduced earned on listed stocks and interest tax regime were not high on the some levies on banks and financial on government bonds to non- government’s agenda, and there institutions to comply with the residents. There are also exemptions was insufficient public consultation Organisation for Economic Co- on interest paid to resident individuals on changes that have been made. operation and Development’s base by the government, local financial Ugandan respondents were also erosion and profit-sharing initiatives. institutions, unit trust schemes and downbeat, saying the country has As a result, the OECD concluded that mutual funds. In addition, there are the highest tax rates on dividends Mauritius does not have a ‘harmful tax holidays or exemptions for venture in the region with no exemptions tax regime’ in terms of unfair tax capital companies, rural banks and real or incentives to encourage financial competition, confirming its position as estate investment trusts. market development. A central banker a compliant jurisdiction. Financial market transparency Figure 3.2: Most countries comply with global accounting standards Adoption of the latest financial International Financial Reporting Standards required reporting and accounting standards IFRS Standards helps improve transparency, which can IFRS Standards are required or The IFRS for SMEs increase domestic and international are required for permitted for Standard is required domestic public investor confidence. International listings by foreign or permitted companies financial reporting standards have companies been widely adopted in 17 of the 20 Botswana    index countries. Of the remaining Ghana    three, Ethiopia is planning a full roll- Kenya    out for public companies by 2020, Mauritius    which would boost its performance in Namibia    this pillar. Ethiopian banks, insurance Nigeria    companies and public enterprises are Rwanda    in the process of adopting IFRS 9, South Africa    transitioning from Generally Accepted Tanzania    Accounting Principles. No domestic Uganda    companies use IFRS in Egypt, while in Zambia    the Seychelles only the central bank Cameroon    has adopted these standards. Ivory Coast    Senegal    There are common complaints Angola    across index countries with regard Morocco    to financial reporting. Those that Mozambique    have adopted IFRS still find market Egypt    reporting hindered by factors such Ethiopia    as a lack of regulatory enforcement Seychelles    or insufficient accountancy and audit Source: International Financial Reporting Standards, OMFIF analysis. Countries are ordered by number of tick marks, then alphabetically. capacity. ‘Financial reports are not

24 | Absa Africa Financial Markets Index 2019

Absa_financial_market_index_2019_live file.indd 24 07/10/2019 09:41 standardised among the players in Figure 3.3: Uganda, Cameroon and ‘It is essential that capital markets,’ said one central Senegal earn corporate ratings supervisors and bank executive in a country with full Number of corporate credit ratings from IFRS adoption. Rules on financial international ratings agencies regulators are well reporting exist in Angola, Ghana, S&P Moody’s Fitch aware of the underlying Mozambique, Namibia and Tanzania, but adoption deadlines were missed South concepts of IFRS 9. They and enforcement remains weak in Africa need to be equipped with 2019: 58 these countries. 2018: 57 the right tools to conduct In Kenya, a senior member of a supervision of fi nancial financial institution said that reporting Mauritius institutions in the most standards had been improved thanks 2019: 27 to a better relationship with the 2018: 27 effective way. It is only central bank, which raised awareness then that they will be able of compliance requirements. A Egypt Nigeria respondent in Rwanda praised its 2019: 5 2019: 5 to gain adequate insights strong regulatory framework for 2018: 4 2018: 18 into the implications reporting. It scores highly in the pillar, finishing fourth overall, with strong Namibia Kenya of IFRS 9 on credit risk 2019: 4 2019: 2 marks for its tax framework and 2018: 6 2018: 5 models and blend the minority investor protection. IFRS 9 requirements with One tax executive from a large Uganda Ghana existing methods and accounting firm in Namibia said, 2019: 2 2019: 1 2018: 0 2018: 2 ‘There remains a shortage of suitably models used for risk and qualified and experienced financial regulatory purpose.’ services expertise in the country. Morocco Angola 2019: 1 2019: 1 This is mitigated by in-house training 2018: 8 2018: 1 Yandraduth Googoolye, governor, (both in audit and in business) and by Bank of Mauritius, August 2019 leveraging off international networks.’ Senegal Cameroon Shortages of accountancy and audit 2019: 1 2019: 1 expertise, either in companies or in 2018: 0 2018: 0

external auditors, were reported in Source: Standard and Poor’s, Moody’s, Fitch, OMFIF analysis Botswana, Ghana, Ethiopia, Nigeria Note: Botswana, Ivory Coast, Ethiopia, Mozambique, Rwanda, Seychelles, Tanzania and Zambia have zero ratings. and Zambia. Another respondent in Nigeria said there was a mindset that viewed transparent financial reporting score is lifted by a strengthening in least partially) to 13, up from 12 last as unnecessary exposure. its protections for minority investors. year and seven two years ago. Ethiopia In contrast, Mauritius scores highly New rules introduced in 2018 stipulate and Cameroon follow Basel I and for its level of financial transparency. that those with at least a 10% share neither have expressed any interest in ‘Listed issuers realise that their of a company are guaranteed a seat on moving on to Basel II or III. performance as a listed company its board. Implementing the most recent Basel is not only linked to the growth in While the number of international rules signals financial development specific metrics over time, but also on ratings in Nigeria fell to five, its local and stability to international investors. how they communicate these metrics,’ credit ratings industry provides at If banks are expanding internationally, said one respondent from the country. least 25 corporate ratings. It also it can reassure host country regulators International credit ratings also receives a high number of ratings from and market participants that they aid transparency. South Africa and South African agency GCR Ratings, are governed well at home. If a Mauritius have the most corporate which has strong coverage in South country’s banking system is relatively credit ratings from the three main Africa and Kenya. insulated, such as Ethiopia’s, it is less ratings agencies with 57 and 27 incentivised to adopt the latest rules. Banking standards respectively. The rest of the index As part of its banking sector clean- countries are far behind. Egypt has Senegal’s score improves after up, the Bank of Ghana revoked the the third-highest number with five, starting its five-year transition to a licenses of 23 insolvent savings up from four last year. It moves five combination of Basel II and III banking and loans companies and finance places up the pillar. Along with the regulations. It takes the number of houses, which followed the closure of extra credit rating, the country’s countries implementing Basel III (at numerous small finance firms.

Absa Africa Financial Markets Index 2019 | 25

Absa_financial_market_index_2019_live file.indd 25 07/10/2019 09:41 Pillar 4: Capacity of local investors

Jebha, Morocco 35.2035° N | 4.6644° W

Absa_financial_market_index_2019_live file.indd 26 07/10/2019 09:41 Unlocking savings to lift capital market development

Financial inclusion strategies complement the build-up of pension assets, allowing savings to be invested in a wider variety of products.

Figure 4.1: Countries with large pension AUM per capita have high domestic investment Figurepotential 4.1: Countries with large pension AUM per capita have high domestic investment potential Scores for Pillar 4 indicators, max=200; harmonised score, max=100 (RHS) Scores for Pillar 4 indicators, max=200; harmonised score, max=100 (RHS) 200 100 180 90 160 80 140 70 120 60 100 50 80 40 60 30 40 20 20 10 0 0 a a o pt ue ria les ola ana q e egal opia itius oc c roon e l anda mbia b i i g Eg y Afri c ganda Kenya Gha n s w nzania amibia An g N Z a U Se n R w ry Coast N Eth i Mo r th T a Mau r Bo t Cam e Seyc h Iv o So u Moza m Pension and insurance assets to domestically listed assets, accounting for market activity Pension fund AUM per capita Pillar 4 harmonised score (RHS)

Sources:Sources African: AfDevelopmentrican Devel Bank,opment Organisation Bank, Orforg Economicanisatio Co-operationn for Econo andmic Development, Co-operation national and stock exchanges, ThomsonDev Reuters,elopme nationalnt, nati centralonal s tobanks,ck excha nationalnge pensions, Thom regulators.son Re uterNote:s ,The na tiharmonisedonal cent scoreral banks (RHS) ,represents national the average of both Pillar 4 indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39. pension regulators. Note: The harmonised score (RHS) represents the average of both Pillar 4 indicators and is used to compile the total scores for Pillars 1-6. More information on p.38- 39. Absa Africa Financial Markets Index 2019 | 27

Absa_financial_market_index_2019_live file.indd 27 07/10/2019 09:41 Pension funds and other institutional funds plenty of investment options. Its contribute. While regulation can hinder investors play a vital role in capital pension funds are also large relative institutional investment, an Ivory Coast market development. Not only do to the capitalisation of assets listed on analyst said institutional investors they become sizeable investors the Johannesburg market, which means face capacity limitations in managing as economies mature, their long they contribute to its liquidity and the risk associated with newer asset investment horizon allows them development, as well as benefitting classes. to move away from government from it. Kenya’s pension assets rose by 17% securities and cash towards Mauritius is second. It moves up from the previous year to $10.5bn. investments such as listed equities, from last year due to the inclusion of However, one respondent said ‘the infrastructure financing, corporate the country’s National Pension Fund fragmentation of those assets in many bonds and private equity. Policies and National Savings Fund, state- small pension fund schemes, the that support financial inclusion and owned pension funds with sizeable broken relationship between pension encourage long-term savings help investment portfolios. Many index fund trustees and managers, and build up countries’ pool of pension countries lag on the size of their per limited capacity and motives to invest assets, increasing the capacity of capita pension assets; it is below $100 in securities other than government domestic investors and stimulating in 11 of them. debt and real estate’ hampered demand for a wider range of financial pension funds’ contribution to capital products. The Seychelles and Morocco also score market development. Government highly. Morocco has a large ratio of Pillar 4 also considers the size of securities account for 39% of Kenya’s pension assets to listed securities at pension funds relative to their local pension assets, followed by real 52%, but falls short on market liquidity. stock market capitalisation (for both estate at 20%. Large allocations to bonds and equities), to indicate Investment strategy government securities are common how much potential there is for Ethiopia’s pension assets climbed across index countries. institutional investors to propel 29% to $3.3bn by end-2018. The In Uganda, where pension assets have capital market growth. At the same increase is entirely accounted for by also risen, government securities time, the pillar considers market larger holdings of Ethiopian Treasury account for 75% of assets and quoted liquidity in terms of turnover, as larger bills, which the main pension funds equities 14%. Where local equity institutional investors faced with a are required to hold. One survey markets are small, pension funds restricted local market may adopt buy- respondent said the requirement tend to hold significant amounts of and-hold strategies or invest in mostly to invest most of their assets in sovereign bonds. international assets. government securities was an Some pension funds have higher South Africa is top of the pillar. It has impediment to investment in private allocations to equities. Namibia has the second-highest pension fund AUM assets. Ethiopia has been growing 56% of its pension fund assets in per capita. Its capital markets are actively its two major pension equities and only 22% in fixed income. deep and liquid, giving local pension funds by requiring more people to However, the outlook for investment in equities and market liquidity is downbeat. ‘Thin market trading and local asset requirements limit access Figure 4.2: Mauritius leads a small group of pension high achievers to and volumes of assets that may Pension5,000 fund AUM per capita, $ be invested in,’ said one respondent 4,500 in the country. Namibian pension 4,000 funds are required to invest 45% of 3,500 their investment portfolio in local 3,000 assets, a proportion that has climbed 2,500 steadily over the last two years from 2,000 35%. Local assets are thought to be 1,500 illiquid; most trading on the Namibian 1,000 exchange is in dual-listed mining 500 companies with operations in the - country but which are not considered a a e local. With pension funds’ investments restricted to a less liquid market, Egypt Kenya Ghan Angola Nigeria Zambi Uganda Senegal Rwanda Namibia Ethiopia

Morocco Namibia's pillar score may drop in Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast future. However, in the longer term South Africa Mozambiqu Sources: National central banks, national financial regulators, pension industry trade bodies, national finance the policy may encourage more local ministries, African Development Bank, Organisation for Economic Co-operation and Development, OMFIF analysis listings.

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Absa_financial_market_index_2019_live file.indd 28 07/10/2019 09:41 Pension funds in other countries year created a mobile application ‘While there has been have been encouraged to consider enabling retail investors to invest in investments in infrastructure projects. listed securities. great leaps in the An amendment to Nigeria’s Pension Banks are playing a role in some development of capital Reform Act gave legal basis for countries. Ethiopia requires banks markets in Africa, there pension fund administrators to invest to expand their branches into rural in projects through infrastructure remains a gap in the areas as part of the country’s financial funds, bonds and sukuk. More than inclusion strategy, along with targets intermediation role of $44m of Nigeria’s pension assets for automated teller machines and point African capital markets was invested in infrastructure in of sale terminals per capita. 2018. While representing less than as domestic pools of 5% of total pension assets under Respondents said regulatory funds from pension and management, the investment clarifications have been helpful. demonstrates how pension funds In Tanzania, the microfinance bill insurance companies can contribute to broader national passed late last year formalises rules continue to see major development goals. around micro-savings, small loans to households and small businesses, and growth. Therefore, Building up savings micro-insurance. The Bank of Botswana more needs to be done Most countries have a financial earlier this year implemented electronic to improve fi nancial inclusion initiative run by their central payment services regulations – rules on bank or finance ministry, which can the licensing and oversight of electronic infrastructure and make help unlock savings. Nigeria last year payments services providers. Some Africa’s capital markets revised its National Financial Inclusion respondents said addressing concerns Strategy and aims to have 70% of its around cybercrime and data protection more attractive, in areas adult population included in the formal would be important. such as cross-border financial services sector by 2020, up Many respondents said financial listings, settlements, from 58.4% in 2016. Rwanda’s national education for citizens and public and payments for strategy for financial inclusion is authorities was one of the best things expected by one survey respondent to that could be done to improve financial transactions.’ win cabinet approval by end-2019. inclusion. The Central Bank of Kenya Economic growth is increasing the and Kenya Bankers Association are Denny Kalyalya, governor, potential capital that can be accessed championing financial education Bank of Zambia, September through greater financial inclusion. through various seminars, a respondent 2018 ‘Kenya’s growing, emerging middle said. Authorities in Botswana and class presents significant potential as Mozambique are using TV and radio retail investors that could be tapped programmes to share knowledge widely. with appropriately tailored investment products,’ said one survey respondent. Additional M-Akiba infrastructure bonds were issued in the first half Figure 4.3: Namibia can raise investment in domestic companies of 2019. Kenyan retail investors can Pension fund assets, % of listed securities access these government-issued bonds 140 through their mobile phones with a 120 minimum investment equivalent to $30. Botswana is planning a similar policy, 100 according to one policy-maker. 80 ‘Financial inclusion is being largely 60 driven by mobile money platforms 40 rather than banks,’ said one central 20 bank official. One capital market participant in Cameroon, which has 0 the lowest pension fund AUM per Egypt Kenya Ghana Angola Nigeria Zambia Uganda Senegal

capita in the index, said, ‘Most financial Rwanda Namibia Morocco Tanzania Mauritius Botswana Cameroon Seychelles

institutions are launching digital Ivory Coast South Africa Mozambique services or products. And people are Note: Ethiopia has no securities exchange. quickly getting on board.’ The Mauritius Sources: National central banks, national financial regulators, pension industry trade bodies, national finance ministries, African stock exchange last Development Bank, Organisation for Economic Co-operation and Development, national securities exchanges, OMFIF analysis

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Absa_financial_market_index_2019_live file.indd 29 07/10/2019 09:41 Pillar 5: Macroeconomic opportunity

The White Desert, Egypt 27.3637° N | 28.1219° E

Absa_financial_market_index_2019_live file.indd 30 07/10/2019 09:41 Ambitious strategies for national transformation

While index countries’ average rate of growth remains largely unchanged from last year, the ratio of non-performing loans to GDP is falling in several major economies.

FigureFigure 5.1: 5.1: Growth Growth and export export strength strength lift Egypt lift toEgypt top spot to top spot

ScoresScores for Pillarfor Pillar 5 indicators, 5 indicators max=800;, max=800; harmonised harmonised score, score, max=100 (RHS)(RHS)

800 100

700 90 80 600 70 500 60 400 50

300 40 30 200 20 100 10 0 0 Egypt Kenya Ghana Angola Nigeria Zambia Uganda Senegal Rwanda Namibia Ethiopia Morocco Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast South Africa Mozambique GDP growth Living standards Growth and absolute export market share Quality of banks Debt profile Macro data standards MPC outcomes transparency Budget release Pillar 5 harmonised score (RHS)

Source: International Monetary Fund, World Bank, national central banks, national finance ministries, African Development Bank, Source:OMFIF analysis. International Note: The Monetary harmonised Fund, score World(RHS) represents Bank, national the average central of all banks, Pillar 5 indicatorsnational financeand is used to compileministries, the total scores African for PillarsDevelopment 1-6. More Bank,information OMFIF on analysis.p.38-39 Note: The harmonised score (RHS) represents the average of all Pillar 5 indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39. Absa Africa Financial Markets Index 2019 | 31

Absa_financial_market_index_2019_live file.indd 31 07/10/2019 09:41 Pillar 5 evaluates economic reached with the IMF on policies that approving a $3.7bn bail-out for the performance, financial risks could form the basis of a new reform former at the end of last year. Angola and financial transparency, as programme focusing on achieving is pursuing a ‘National Development demonstrated by availability of data, the country’s ‘National Strategy for Plan 2018-22’, which includes open monetary policy communication Transformation 2017-24’, a plan to unifying its exchange rate system and and the timely release of state accelerate urbanisation and financial investing in infrastructure and non-oil budgets. market development. The IMF sectors. However, falls in oil revenue programme, which would not involve have hindered its ability to spend Egypt has the highest overall Pillar financing, looks at broadening the tax substantially on public investment. 5 score this year, overtaking South base, improving access to financial Africa. While Egypt’s GDP per capita The average rate of economic growth services, and supporting the National remains fairly low compared with across index countries was 4.3% in Bank of Rwanda’s new forward- other countries, the country ranks 2018, mostly unchanged from 2017’s looking monetary policy framework. highly on both economic and export 4.4%. Under that structure, the central bank growth. This year, Egypt completed will assign the short-term interbank Financial risks down as NPL ratios the final review of its three-year rate as an operational target and drop $12bn International Monetary Fund adjust this based on its inflation programme, with its credit rating Bank balance sheets broadly improved forecast, rather than targeting the upgraded by ratings agencies after in 2018, with non-performing loans level of reserves balances and broader several years of high and stable ratios shrinking in most countries. monetary aggregates. growth rates. South Africa has much However, the rising dollar in 2018 higher GDP per capita than Egypt, Senegal scores well in terms impacted negatively on external but the sluggish growth it registered of growth. Like Rwanda, it has financing for some countries. in 2018 has continued in 2019, maintained high growth rates while Egypt, Mauritius, Nigeria, Rwanda, worsened by power outages caused the government undertakes the Tanzania and Uganda all registered a by problems plaguing its state-run ‘Emerging Senegal’ plan, a long-term decline in NPL ratios, boosting their electric utility. reform agenda aiming to make the Pillar 5 scores. Egypt’s dropped to country a middle-income economy by Rwanda rises six places, the 3.9% from 5.5%, giving it one of the 2035. largest jump in the pillar, after its lowest shares of bad credit across economy grew 8.6% in 2018 and Oil-dependent economies like Angola the continent. CDC Group, the UK’s share of regional exports expanded. and Nigeria continue to struggle development finance institution, Preliminary agreement has been with low oil prices, with the IMF this year gained approval to invest £200m of tier-two capital in Egypt’s banks. Late last year Moody’s upgraded Egypt’s banking system outlook to positive from stable. The Figure 5.2: Morocco leads export gains as oil-focused exporters lose ground country has joined several others Percentage point change in export market share, 2013 vs 2018 in ramping up capital requirements in line with international standards, 4 which is expected to facilitate market consolidation. 2 Bank mergers and acquisitions, 0 propelled mostly by the need to increase capital buffers, have been -2 seen across African economies such as Ghana, Kenya and Angola. The -4 Bank of Ghana last year merged five commercial banks that did not meet -6 the minimum capital requirements set in 2017, creating Consolidated -8 Bank Ghana. Some banking M&A has l t t s a a a ia la

da been market-led, such as in Kenya, as yp an an ique itiu s where a scramble for balance sheet Eg Keny Gh Ango Nigeria Zambia mb Ugan Senega Rwanda Namibi Ethiopia Morocco size and market share is spurring Tanz Maur Botswana Cameroon Seychelle Ivory Co consolidation. South Africa Moza NPL ratios are expected to fall further Source: International Monetary Fund, OMFIF analysis in Mauritius, with a large share of state-owned MauBank’s bad loans

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Absa_financial_market_index_2019_live file.indd 32 07/10/2019 09:41 Figure 5.3: Credit quality broadly improved, but treatment of non- ’Bank mergers performing loans differ by Basel stage NPLs, % of gross loans and acquisitions, propelled mostly by 30 the need to increase 25 capital buffers, have 20 been seen across 15 10 African economies 5 such as Ghana, 0 Kenya and Angola.’ a a s a a o a a a ny negal Egypt Ke Ghan Angola Zambia Nigeri Ugand ychelles Se Namibi Rwanda Ethiopi Morocc Tanzania Mauritiu Cameroon Botswan Se Ivory Coast South Africa Basel IIIBMozambique asel II Basel I 2017 2018

Source: International Monetary Fund, national central banks, OMFIF analysis. Note: Mauritius, Kenya, Seychelles and Ghana are implementing aspects of Basel II/III. Morocco implemented Basel III capital adequacy in July 2015. Uganda still uses the Basel I capital adequacy ratio. Rwanda has adopted the Basel III liquidity coverage ratio.

moving to a special purpose vehicle debt ratio at 145.8% of GDP, which committee meetings clearly on its and banks accelerating write-offs. includes both public and private website. Morocco’s central bank In Nigeria the sale of NPLs to asset debt. However, that has fallen from a circulates a full year-ahead calendar of management companies has aided peak of 158% in 2016. Mozambique monetary policy announcements and the country’s ratio, but the IMF has came to an agreement with creditors its monetary and survey data releases. warned that some restructured earlier this year on the restructuring The quality of central bank reporting loans, which could account for 30% of its 2023 Eurobond, but a June tends to be high across the index, with of loans in some institutions, may ruling by the country’s constitutional most countries publishing detailed be masking further asset quality court that prior debt issuance tied minutes or reports explaining policy deterioration, especially those linked to the Eurobond was illegal has cast decisions. to the oil sector. Varying levels of uncertainty over the agreement. Tanzania this year repealed an compliance with Basel regimes hinder Egypt's score worsens on its external amendment to its 2015 Statistics the comparability of reported NPL debt as it climbed to 47.1% of GDP Act that made it a criminal offence to levels. For example, Ethiopia has the from 40.4%. It launched a pan-Asian publish figures not approved by the lowest NPL ratio in the index, but this roadshow for its bonds last year National Bureau of Statistics. The law is based on the more forgiving Basel I in a bid to lift demand for dollar- again allows groups and individuals definitions. denominated Eurobonds before some to collect and distribute relevant External debt profiles worsened sizeable issuances on the Luxembourg information. slightly. Seven index countries have exchange. Despite undoing the amendment, external debt greater than 55% of Zambia leads financial Tanzania scores lower this year on both GDP, the level beyond which the IMF transparency improvement its budget release and data standards, considers there to be a strong risk of and in April the country blocked the debt distress. China’s Belt and Road Zambia and Ivory Coast improve their publication of its IMF Article IV report, initiative exacerbates concerns about scores on Pillar 5’s budget-related a macroeconomic health check. Press foreign debt, with Mozambique, Kenya, items, with more accessible budget leaks suggest the report was critical of Nigeria, Ethiopia and Angola among reporting accompanied by spending a more difficult business environment, index countries that have received breakdowns. with the IMF forecasting lower growth financing for infrastructure projects. The Bank of Botswana now publishes over the next five years, weighing on Mozambique has the highest external the dates of future monetary policy Tanzania’s Pillar 5 score.

Absa Africa Financial Markets Index 2019 | 33

Absa_financial_market_index_2019_live file.indd 33 07/10/2019 09:41 Pillar 6: Legality and enforceability of standard financial markets master agreements

Tsingy de Bemaraha, Madagascar 18.8977° S | 44.8298° E

Absa_financial_market_index_2019_live file.indd 34 07/10/2019 09:41 Mitigating risks through legal and contractual certainty

Strong legal frameworks, clear rules on property rights and the recognition of internationally accepted legal standards build an attractive investment environment.

Figure 6.1: Mauritius and Kenya overtake South Africa with improving insolvencyFigure 6.1: regimes Mauritius and Kenya overtake South Africa with improving insolvency regimes ScoresScores for Pillarfor Pillar 6 indicators, 6 indicators max=400;, max=400; harmonisedharmonised score, score, max=100 max=100 (RHS) (RHS)

400 100 350 90 80 300 70 250 60 200 50 150 40 30 100 20 50 10 0 0 Egypt Kenya Ghana Angola Nigeria Zambia Uganda Senegal Rwanda Namibia Ethiopia Morocco Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast South Africa Mozambique

Netting position enforcement Collateral position enforcement Standard master agreements Insolvency framework Pillar 6 harmonised score (RHS)

Sources: World Bank Doing Business, national central banks, OMFIF analysis. Note: The harmonised score (RHS) represents the averageSources: of all Worl Pillard 6B indicatorsank Doing and Bu issiness used to, national compile thecentral total banks,scores for OMFIF Pillars analysis. 1-6. More Note: information The on p.38-39. harmonised score (RHS) represents the average of all Pillar 6 indicators and is used to compile the total scores for Pillars 1-6. More information on p.38-39. Absa Africa Financial Markets Index 2019 | 35

Absa_financial_market_index_2019_live file.indd 35 07/10/2019 09:41 Financial market growth requires year for having a slightly stronger contractual framework for over-the- adequate legal frameworks that insolvency regime than runners-up counter trading globally. All but four mitigate uncertainty for market Kenya and South Africa, as measured index countries have some experience participants, especially those entering by their scores in the World Bank’s with it. Rwanda earns points for new jurisdictions. Adherence to ‘Doing Business 2019’ report. Netting adoption of this master agreement, global contractual standards and the and collateral positions are enforced in with the central bank reporting that it establishment of strong insolvency these countries, and all three master has used it for cross-currency swaps processes contribute to the overall agreements considered in this pillar are with a multilateral development bank. health and attractiveness of a financial widely recognised. The Global Master Repurchase system. Standard master agreements Agreement governs repurchase Pillar 6 measures how well countries agreements, often used in cross-border The use of standard master have adopted internationally accepted transactions as well as domestic repo agreements in financial transactions legal standards based on their markets. Nine index countries are yet in developing markets helps build recognition of master agreements, the to use the GMRA, while others are trust by demonstrating their readiness enforcement of netting and collateral either already using it regularly or in to adopt internationally recognised positions, and the adequacy of some limited way. procedures. The master agreement of insolvency regimes. the International Swaps and Derivatives The Global Master Securities Lending Mauritius takes the top spot this Association is the most widely used Agreement provides a contractual framework for securities lending arrangements. Only six index Figure 6.2: More countries adopting global contractual standards countries have used the GMSLA, Use of key financial master agreements indicating a reliance on domestic legal Country ISDA GMRA GMSLA arrangements in the countries yet to adopt it. Kenya’s index performance Kenya Well recognised Well recognised Well recognised improved, reflecting its adoption of the South Africa Well recognised Well recognised Well recognised GMSLA. Namibia Well recognised Well recognised Well recognised Enforcement of netting and Nigeria Well recognised Well recognised Well recognised collateral positions Mauritius Well recognised Well recognised Limited use Master agreements set out standards Tanzania Well recognised Well recognised Limited use for the netting of contractual Botswana Well recognised Well recognised - obligations. Enforcing these Zambia Well recognised Limited use - agreements’ netting provisions reduces credit risk in a local derivatives Ghana Well recognised Limited use - market, as well as overall risk in a Uganda Well recognised Limited use - financial system. Similarly, collateral Rwanda Well recognised - - arrangements provide protection in Angola Limited use Limited use Limited use default scenarios. Mozambique Limited use - - In some jurisdictions, netting Senegal Limited use - - legislation as proposed by ISDA has either been adopted or incorporated in Seychelles Limited use - - existing banking laws, increasing the Cameroon Limited use - - likelihood that netting positions will be Ivory Coast - - - enforced. South Africa and Mauritius, for example, have laws with provisions Egypt - - - that cover netting. Countries like Ethiopia - - - Ghana, Morocco and the Seychelles Morocco - - - are considering enacting netting Sources: Africa Financial Markets Index survey, OMFIF analysis legislation.

36 | Absa Africa Financial Markets Index 2019

Absa_financial_market_index_2019_live file.indd 36 07/10/2019 09:41 Figure 6.3: Kenya, Rwanda and Morocco improve insolvency procedures ‘Adequate Score for resolving insolvency, 0-100 insolvency Mauritius procedures Kenya Rwanda improve investor South Africa confi dence, Morocco Seychelles mitigate risks Ivory Coast and encourage Botswana Mozambique business growth.’ Senegal Zambia Egypt Uganda Tanzania Namibia Cameroon Ethiopia Nigeria Ghana Angola 01020304050607080 2019 2018

Sources: World Bank Doing Business, OMFIF Analysis

Insolvency processes is under administration, which aims to encourage lending to insolvent Adequate insolvency procedures companies as they recover. improve investor confidence, mitigate risks and encourage business growth. Morocco shows the biggest Scores from the World Bank’s ‘Doing improvement from the previous year, Business’ report consider the quality giving debtors access to new financing of insolvency laws, the efficiency while under insolvency proceedings. of bankruptcy and reorganisation Rwanda’s score also rises in the light processes, the time and cost of of a new insolvency law passed in resolution, and the recovery rate for 2018, as well as further training for claimants. insolvency practitioners, members of the judiciary and banking professionals. Kenya scores well for its insolvency law that encourages rehabilitation through The refinement of insolvency administration of companies facing frameworks, along with adoption financial difficulty. Enacted in 2015, the of standard international master law has since been amended to give agreements, will help business more flexibility for the continuation of environments thrive. Policy-makers a business while undergoing insolvency must invest in the legal and contractual procedures. Another revision being frameworks that will enable market considered prioritises the repayment players to transact more comfortably of loans incurred while a troubled firm on a wider scale.

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Absa_financial_market_index_2019_live file.indd 37 07/10/2019 09:41 METHODOLOGY

The Africa Financial Markets Index in focus

Using a variety of parameters, both qualitative and quantitative, the Absa 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 depth Quality of financial reporting • Commitment to international accounting and reporting Product diversity standards (GAAP, IFRS) • Type of assets available Tax environment • Currency availability of stock exchange products • Existence of withholding taxes, special taxes • Number of hedging products available and tax treaties Size of market • Time taken to rebate withholding taxes on investments • Total sovereign and corporate bonds, market capitalisation, ratio to GDP Financial information availability • Existence of fixed dates and times for market reporting Liquidity • Publishing of data on sector and domestic vs non- • Total turnover of equities and bonds ratio to resident ownership of domestic assets market capitalisation and bonds outstanding, respectively Market development Depth • Existence and effectiveness of capital markets • Ability to clear government instruments denominated in association local currency in international markets • Existence and strength of rules protecting minority • Existence of secondary market makers (bond market) shareholders • Closing auction for fair tradeable market prices • Existence of sovereign rating (Fitch, Moody’s, S&P) • Number of corporate ratings issued (Fitch, Moody’s, S&P) Primary dealer system • Existence of system • Size of repo market Pillar 4: Capacity of local investors

Local investor asset concentration Pillar 2: Access to foreign exchange • Value of pension assets per capita Net portfolio flows, ratio to reserves • Pension fund assets, ratio to total market capitalisation • Total net portfolio flows, ratio to foreign exchange of equities and bonds listed on exchanges reserves

Foreign exchange liquidity Pillar 5: Macroeconomic opportunity • Interbank market foreign exchange turnover GDP growth Capital restrictions • Composite five-year historical GDP average (2012-17) • Foreign exchange capital controls and five-year forecast (2018-23)

Official exchange rate reporting Living standards • Quality of data and frequency of publication • GDP per capita • Existence of multiple or unified exchange rate Competitiveness Pillar 3: Market transparency, • Absolute export market share and growth in export tax and regulatory environment market share over past five years Macroeconomic data standards Financial stability regulation • Publication and frequency of GDP, inflation and • Basel accords implementation stage interest rate data

38 | Absa Africa Financial Markets Index 2019

Absa_financial_market_index_2019_live file.indd 38 07/10/2019 09:41 Budget release Pillar 6: Legality and enforceability • Regular release of budget of standard financial markets master Monetary policy committee outcomes transparency agreements • Frequency and regular publishing of MPC decisions and Netting and collateral positions meeting schedules • Enforced netting and collateral positions

Debt profile Use of financial market master agreements • External debt-to-GDP • Use of ISDA master agreements, GMRA, GMSLA or own non-standard agreements Quality of banking sector assets Insolvency framework • Non-performing loans ratio • Recovery rate and strength of insolvency framework

Methodology

Pillars and indicators Harmonisation and scoring The index scores each country based on six pillars: Raw data are harmonised on a scale of 10-100 to allow market depth; access to foreign exchange; market comparability between indicators. transparency, tax and regulatory environment; capacity of local investors; underlying macro opportunity; and the Outliers in the raw data falling above or below two legality and enforceability of standard financial markets standard deviations of the mean are accounted for master agreements. Pillars are built from a set of key during the scoring. In the case of an outlier greater than indicators listed on p.38-39. the upper bound, its value is replaced by the next- highest data point in the sample. This means Each individual indicator is weighted equally in each indicators can have more than one country scoring pillar, and each pillar is weighted equally in the overall maximum points. index score. The scoring of each indicator and pillar works under the same process. Once indicators have a harmonised score, Data and survey the average is taken across each indicator in a pillar to The data informing the scores for each pillar and their create the overall pillar score. Similarly pillar scores are indicators stem from a mixture of quantitative and averaged to create the country’s composite score. qualitative analysis. The quantitative data collected are of the latest year available. For full year statistics (i.e. GDP) this is 2018 data. For statistics covering the How to get full marks previous 12 months (i.e. securities market turnover) this As the index is a comparison of a country’s financial is July 2018-July 2019. In cases where the data refer to market against the selected sample, a country can current conditions, such as for the Basel implementation reach the maximum score of 100. In such a scenario, the stages, international accounting standards, and credit country must achieve the maximum score of 100 in all ratings, the data are as of mid-August 2019. six pillars. 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 from June-August 2019, covering more than 40 individuals from 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.

Absa Africa Financial Markets Index 2019 | 39

Absa_financial_market_index_2019_live file.indd 39 07/10/2019 09:41 Absa Group Limited Official Monetary and Financial Institutions Forum 15 Troye Street, Johannesburg, 2001, South Africa 30 Crown Place, London, EC2A 4EB, United Kingdom T: +27 (0) 11 350 4000 T: +44 (0)20 3008 5262 www.absa.africa www.omfif.org @Absa @OMFIF

40 | Absa Africa Financial Markets Index 2019

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