Absa Africa Financial Markets Index 2020

Africa’s possibility is in the detail

Pictured: The iridescent feathers of the African peafowl

Absa Africa Financial Markets Index 2020 | 1 The Absa Africa Financial Markets Index Absa Group Limited (‘Absa Group’) is listed on the Johannesburg Stock was produced by OMFIF in association Exchange and is one of Africa’s largest diversified financial services groups. with Absa Group Limited. The scores on p.7 and elsewhere record the Absa Group offers an integrated set of products and services across total result (max=100) of assessments personal and business banking, corporate and investment banking, wealth across Pillars 1-6. For methodology, and investment management and insurance. see individual Pillar assessments and Absa Group has a presence in 12 countries in Africa, with approximately 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 analysis. it owns majority stakes in banks in Botswana, Ghana, Kenya, Mauritius, Qualitative survey data were collected Mozambique, Seychelles, South Africa, Tanzania (Absa Bank Tanzania and and analysed by OMFIF. National Bank of Commerce), Uganda and Zambia. The Group also has representative offices in Namibia and Nigeria, as well as insurance operations © 2020 The Absa Group Limited and in Botswana, Kenya, Mozambique, South Africa, Tanzania and Zambia. OMFIF Ltd. All Rights Reserved. For further information about Absa Group Limited, please visit www.absa.africa Absa Marketing and Events team The Official Monetary and Financial Institutions Forum is an independent think tank for central banking, economic policy and public investment – a Fiona Kigen, Vice-President, Marketing: non-lobbying network for best practice in worldwide public-private sector Investment Banking, Erica Bopape, Head of Marketing: Investment Banking, exchanges. At its heart are Global Public Investors – central banks, sovereign funds and public pension funds – with investable assets of $39.4tn, Andile Makholwa, Acting Head of Communications: CIB, Fiona equivalent to 43% of world GDP. With offices in both London and Singapore, Mbalula, Business Partner, External OMFIF focuses on global policy and investment themes – particularly in Communications: CIB, Varini Chetty, asset management, capital markets and financial supervision/regulation Digital Lead: CIB, Gerald Katsenga, – relating to central banks, sovereign funds, pension funds, regulators Head of Corporate Sales: Absa Regional and treasuries. OMFIF promotes higher standards, invigorating exchanges Operations, Fabian Govender, Chief of between the public and private sectors and a better understanding of the Staff: CIB, Tiisetso Mosoane, Deputy world economy, in an atmosphere of mutual trust. Chief of Staff: Office of the Group Chief Executive, Kirsty Van Der Nest, Vice- For further information about OMFIF, please visit www.omfif.org President: Group Stakeholder Relations, Phumza Macanda, Head of Media Relations

OMFIF Editorial, Meetings and Marketing team

Simon Hadley, Director, Production, William Coningsby-Brown, Assistant Production Editor, Julie Levy- Abegnoli, Subeditor, Stefan Berci, Communications Manager, James Fitzgerald, Marketing Manager, Ben Rands, Head of Logistics, Jamie Bulgin, Lead Relationship Director, Macro-economic coverage, Henry Wynter, Head of Strategic Partnerships, Katie-Ann Wilson, Programmes Manager Emerging Markets.

2 | Absa Africa Financial Markets Index 2020 Contents

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

Acknowledgments 10 26-29

Pillar 1: Market depth Pillar 5: Examines size, liquidity and Macroeconomic depth of markets and diversity of opportunity products in each market. Assesses countries’ economic prospects using metrics on growth, debt, export competitiveness, banking sector risk and availability of macro data. 14-17

30-33 Pillar 2: Access to foreign exchange Pillar 6: Legality and Assesses the ease with which enforceability of standard foreign investors can deploy and financial markets repatriate capital in the region. master agreements

Tracks the commitment to international financial master agreements, enforcement of netting and collateral positions 18-21 and the strength of insolvency frameworks.

Pillar 3: Market transparency, tax 34-37 and regulatory environment

Evaluates the tax and regulatory Indicators and Methodology 38-39 frameworks in each jurisdiction, as well as the level of financial stability and of transparency of financial information.

22-25

Absa Africa Financial Markets Index 2020 | 3 FOREWORDS Building the foundation for tomorrow’s successes

Daniel Mminele Group Chief Executive Absa Group

The Absa Africa Financial Markets Index is being released at Aim of index a time when many African countries are grappling with the profound economic and health challenges posed by Covid-19. African economies are The outlook remains highly uncertain in most markets, as undergoing a significant downside risks continue to persist. With the global economy forecasted to contract in 2020, our continent is expected to period of transition and experience the first severe recession since 1992, placing pressure on public finances, and eroding the progress that many countries appraisal, with growing had made towards poverty alleviation and the Sustainable foreign investment Development Goals. Volatility, uncertainty, and risk are likely to remain at elevated levels, making medium-term planning difficult interest and much until such time as effective vaccines are successfully developed, comprehensively tested, and globally distributed. examination of the These unpredictable operating conditions foretell challenging continent’s potential for times for financial markets for the foreseeable future, requiring continued effort from stakeholders, and even more regional mobilising local resources. economic collaboration than ever before, in order to maintain Now in its fourth year, stability and regain market confidence. In this landmark year, we are proud to partner once again the index has become with OMFIF in releasing the fourth edition of the Afmi. We are particularly pleased that this 2020 edition adds a further three a benchmark for the markets, taking the total to 23 countries evaluated, further investment community expanding our coverage of Africa’s financial markets. Since its launch in 2017, the Afmi has become a key reference and Africa generally tool used by policymakers and market participants to guide to gauge countries’ their efforts in developing robust financial markets in Africa. By establishing a common fact-base that allows cross country performance across comparisons, the index helps anchor policy discussions between regulators, exchanges, investors and corporates on how to a host of indicators promote the open, accessible and transparent markets, that are best placed to mobilise capital, and promote investment on the important for financial continent. market development. Africa’s path through and beyond the Covid-19 crisis will be determined largely by the decisions that governments, the private sector, and development partners take over the next few months; bold and urgent decisions are required for us to successfully navigate this turbulent time, but such decisions must also be informed, collaborative and responsible. The Absa Group is one of Africa’s largest diversified financial services institutions and, as a proudly pan-African business, we are committed to playing our part in co-creating solutions that will support this continent to not only survive these challenging times, but help ensure an even stronger foundation on which tomorrow’s successes can be built. 4 | Absa Africa Financial Markets Index 2020 Harnessing the power of Reasons to be capital markets optimistic

Jingdong Hua Hippolyte Fofack Vice-President and Chief Economist and Treasurer, World Bank Director of Research and International Co-operation, African Export-Import Bank

The fourth annual Absa Africa Financial Markets Index Africa is heading for its first recession in more than 25 comes at an unprecedented time in history when the years. However, there are reasons to be optimistic about region, and the world, face complex Covid-induced the continent’s growth prospects. The near-term outlook challenges. The pandemic has generated a wide range of points to increased resilience of African economies, with spillover effects in Africa, including direct health impacts output expanding above trend growth rates in 2021. of the disease, severe economic shocks from a sudden Fiscal and monetary stimulus programmes are supporting stop in trade and tourism, and lockdowns that slowed local debt markets, helping prevent bankruptcies, and domestic demand. International financial flows seized up, spurring global demand and trade. The countercyclical and many domestic markets did not have the depth to liquidity support of multilateral development banks, support the sharp increase in fiscal needs. including the African Export-Import Bank’s pandemic Governments across Africa have responded quickly to trade impact mitigation facility, is helping countries adjust the virus outbreak, particularly in terms of monetary to the virus-induced macroeconomic fall-out and deal and prudential actions. Efforts are underway to reprofile with pressures on liquidity. sovereign debt across the region through the debt service Recovery will rely on Africa’s commitment to suspension initiative, and there is renewed focus on macroeconomic stability. Decreasing inflationary building local markets. pressures and expectations have enabled central banks The World Bank acted rapidly to approve projects that to extend monetary stimulus and other policy responses addressed emergency needs of member countries – to support small- and medium-sized enterprises, including those in Africa. The International Development helping them avert payment defaults. This shift from Association accessed international capital markets to a single monetary policy objective (inflation targeting) provide concessional, low-cost loans to countries in towards the dual objectives of price stability and growth need. Over a period of 15 months, the World Bank Group represents a profound change in the region’s policy- committed to deploy up to $160bn to help more than 100 making landscape. It denotes the deepening integration countries protect poor and vulnerable people, support of Africa into the world economy. businesses, and bolster economic recovery. Funding from Another key driver of Africa’s improved resilience the World Bank Group includes up to $50bn for African is the African Continental Free Trade Agreement. countries, of which $847m will be spent on 32 health Companies are capitalising on economies of scale and projects. A further $2.9bn will be dedicated to 17 economic productivity gains associated with the defragmentation policy loans. of African economies to spread the risk of investing in As we look ahead, it is clear how the power of capital smaller markets across the region. Expanding growth markets can be harnessed to build back better. Therefore, opportunities and returns on investment are sustaining it is exciting that the index now includes a focus on investment flows and shifting their composition away sustainable finance. from natural resources towards labour-intensive manufacturing industries. Sustainable financing, insuring against natural disasters and pandemics, hedging against commodity volatility, and This structural transformation will increase domestic securing local currency financing are ways governments resource mobilisation and deepen capital markets. This can support the next generation of growth in Africa. will set Africa on a path to fiscal and debt sustainability. The World Bank Treasury is engaged across these areas Expected rising returns on investment will expand throughout the continent, including building sustainable the pool of investors to include those who are pricing capital markets and helping governments consider the full in sustainability preferences to enable Africa’s range of financial solutions for managing risks. industrialisation latecomers to leapfrog into climate- resilient growth models. As the Africa Financial Markets Index 2020 so neatly illustrates, opportunities abound in this diverse and propitious region.

Absa Africa Financial Markets Index 2020 | 5 INTRODUCTION

Testing resilience

During a difficult year, African countries are facing enormous challenges from Covid-19. As the health crisis persists, the resilience of financial systems in every economy is being tested. Financial markets have been disrupted, but expansion and innovation in recent years will benefit the rebound and recovery process.

On its fourth year, the Absa Africa Financial Markets Index presents a wide-ranging view of progress across the region. Coverage of this year’s edition has expanded to include three new countries: Eswatini, Lesotho and Malawi. The addition of these countries reflects mounting interest in the region’s potential as a source of growth and opportunity.

When the index was first released in 2017, only three out of 17 countries scored above 50, with many performing poorly on more than 40 indicators considered. This year, 11 out of 23 countries scored above 50, indicating improvements across the board. Stronger legal frameworks and growing local investor capacity contributed to better scores overall.

The countries whose standing improved the most from last year are Ghana, Morocco and Seychelles. Firmer rules enforcing close-out netting boosted Ghana’s standing. Improving business environments in Morocco and Seychelles earned them points.

The initial impact of the pandemic was felt by countries with high levels of external debt as global investors pulled back investments. The withdrawal of international capital impacted the region’s stock markets as liquidity dropped in the first half of 2020. The sudden drop in foreign activity showed the value of having deep and liquid local markets that can withstand external shocks.

Central banks and financial policy-makers have responded by supporting local debt markets with a variety of tools, earning praise from individuals and institutions that participated in this year’s survey. While the longer-term outlook largely relies on the extent to which activity could resume in the local and global economy, recent progress in financial market development will only serve to improve Africa’s chances of having a rapid and sustainable recovery.

6 | Absa Africa Financial Markets Index 2020 Rank Score 2020 2019 2020 2019 Comments

1 1 South Africa 89 88 Foreign exchange controls eased but ratings downgrade hits liquidity

2 2 Mauritius 79 75 Market infrastructure and tax environment favourable to foreign investment

3 6 Nigeria 65 63 Firmer close-out netting rules set to boost repo and derivatives markets

4 5 Botswana 63 64 T-bill issuance reform expected to deepen bond market

5 4 Namibia 61 65 Large pension fund assets under management, but illiquid markets

6 13 Ghana 59 50 Active foreign exchange market and stronger legal framework

7 3 Kenya 58 65 Improving corporate action governance structure

8 12 Morocco 56 51 Improving market and business environment

9 8 Zambia 53 55 Stronger framework for resolving insolvency

10 10 Uganda 52 52 New primary dealer system set to spur bond market activity

11 14 Seychelles 51 47 Rapid growth in market capitalisation and number of equity listings

12 7 Tanzania 50 55 High transparency in stock market and low tax on dividend income

13 9 Rwanda 50 53 Strong macroeconomic outlook and healthy banking assets

14 11 Egypt 50 51 Liquid equity and foreign exchange markets

15 - Eswatini 49 - Large pool of domestic assets and growing stock exchange

16 16 Ivory Coast 43 41 Expanding bond market and positive macroeconomic outlook

17 15 Mozambique 43 44 Growing stock exchange and attractive tax environment for listed securities

18 - Malawi 37 - Improving transparency and financial stability after IFRS and Basel III adoption

19 18 Senegal 37 35 Promising regional market growth but lacking local institutional investors

20 - Lesotho 33 - Securities exchange still awaiting inaugural listings

21 19 Cameroon 32 35 Bond and equity markets lifted by regional merger of exchanges

22 17 Angola 30 36 Debt crisis overshadows positive tax reforms

23 20 Ethiopia 27 27 Development of market infrastructure in progress

Score across all pillars, max = 100. The fourth edition of the index adds three new countries, Eswatini, Lesotho and Malawi.

Absa Africa Financial Markets Index 2020 | 7 EXECUTIVE SUMMARY

Building Africa’s financial markets

The Absa Africa Financial Markets Index evaluates financial market Pillar 1: Pillar 2: development in 23 countries, and highlights economies with the Market Access to foreign most supportive environment for effective markets. The aim is to depth exchange show present positions, as well as how economies can improve market frameworks to bolster investor access and sustainable growth. The index assesses countries according to six pillars: market depth; access to foreign exchange; market South Africa 100 South Africa 80 transparency, tax and regulatory environment; capacity of local Nigeria 70 Uganda 67 investors; macroeconomic opportunity; and enforceability Mauritius 70 Rwanda 66 of financial contracts, collateral positions and insolvency Botswana 55 Seychelles 65 frameworks. Kenya 52 Egypt 64 Ghana 48 Botswana 60 OMFIF conducted extensive quantitative research using data Namibia 48 Zambia 60 from central banks, securities exchanges and international financial institutions. In addition, OMFIF surveyed over 30 Egypt 45 Tanzania 59 policy-makers and top executives from financial institutions Uganda 42 Lesotho 58 operating across the 23 countries, including banks, securities Zambia 41 Kenya 57 exchanges, central banks, regulators, audit and accounting Mozambique 41 Namibia 54 firms and international financial and development institutions. Senegal 38 Ghana 54 Morocco 37 Mauritius 54 As the index grows, the network of institutions providing data Ivory Coast 36 Morocco 49 and lending expertise to OMFIF’s research is also expanding. Tanzania 35 Ivory Coast 47 Changes to scoring on certain indicators using more granular data impacted scores of some countries, but these all contribute Angola 34 Senegal 46 to the overall reliability of the index as a benchmark of progress. Seychelles 34 Eswatini 45 Rwanda 30 Mozambique 45 Continued on p.10 >> Cameroon 28 Cameroon 36 Eswatini 24 Malawi 32 Malawi 23 Angola 30 Ethiopia 11 Ethiopia 30 Angola (30) Botswana (63) Cameroon (32) Lesotho 11 Nigeria 22 34 55 28 30 60 36 51 82 40 16 61 14 41 72 54 10 46 21

Egypt (50) Eswatini (49) Ethiopia (27) Ghana (59) Ivory Coast (43) Kenya (58)

45 24 11 48 36 52 64 45 30 54 47 57 66 58 37 83 66 74 26 64 10 27 14 41 78 68 55 65 58 67 23 33 19 78 35 57

Mozambique (43) Namibia (61) Nigeria (65) Rwanda (50) Senegal (37) Seychelles (51)

41 48 70 30 38 34 45 54 22 66 46 65 59 71 89 80 54 62 20 92 54 14 12 48 51 70 67 62 49 66 40 31 87 50 24 32

8 | Absa Africa Financial Markets Index 2020 Overall pillar scores max = 100

Pillar 3: Pillar 4: Pillar 5: Pillar 6: Market transparency, Capacity of Macroeconomic Legality and enforceability of tax and regulatory local investors opportunity standard financial markets environment master agreements

South Africa 94 Namibia 92 South Africa 78 Mauritius 98 Nigeria 89 Mauritius 90 Egypt 78 South Africa 94 Mauritius 88 South Africa 86 Botswana 72 Nigeria 87 Ghana 83 Morocco 67 Mauritius 72 Zambia 83 Botswana 82 Eswatini 64 Morocco 72 Ghana 78 Uganda 80 Botswana 61 Uganda 70 Kenya 57 Rwanda 80 Nigeria 54 Namibia 70 Rwanda 50 Zambia 75 Seychelles 48 Eswatini 68 Botswana 46 Kenya 74 Kenya 41 Malawi 67 Tanzania 43 Morocco 74 Tanzania 34 Nigeria 67 Mozambique 40 Tanzania 73 Ghana 27 Kenya 67 Uganda 39 Namibia 71 Egypt 26 Seychelles 66 Morocco 36 Ivory Coast 66 Mozambique 20 Lesotho 65 Ivory Coast 35 Egypt 66 Malawi 20 Ghana 65 Eswatini 33 Seychelles 62 Angola 16 Rwanda 62 Seychelles 32 Malawi 62 Uganda 15 Tanzania 59 Namibia 31 Mozambique 59 Cameroon 14 Ivory Coast 58 Senegal 24 Eswatini 58 Rwanda 14 Ethiopia 55 Egypt 23 Senegal 54 Ivory Coast 14 Cameroon 54 Lesotho 21 Angola 51 Senegal 12 Mozambique 51 Cameroon 21 Cameroon 40 Lesotho 12 Senegal 49 Malawi 21 Ethiopia 37 Zambia 12 Zambia 47 Ethiopia 19 Lesotho 33 Ethiopia 10 Angola 41 Angola 10

Lesotho (33) Malawi (37) Mauritius (79) Morocco (56) KEY 11 23 70 37 58 32 54 49 33 62 88 74 Pillar 1 Market depth 12 20 90 67 Pillar 2 Access to foreign exchange 65 67 72 72 Pillar 3  Market transparency, tax and 21 21 98 36 regulatory environment Pillar 4 Capacity of local investors South Africa (89) Tanzania (50) Uganda (52) Zambia (53) Pillar 5 Macroeconomic opportunity

100 35 42 41 Pillar 6  Legality and enforceability of 80 59 67 60 standard financial markets 94 73 80 75 master agreements 86 34 15 12 (xx) = overall score 78 59 70 47 94 43 39 83

Absa Africa Financial Markets Index 2020 | 9 Acknowledgements The report finds that:

The team consulted more than 30 policy-makers, regulators and  South Africa and Mauritius retain market practitioners across African financial markets in writing this the top spots in the index, scoring report, whom we thank for their views and opinions. Although some 89 and 79, respectively. Although requested anonymity, we thank the following: both perform well in most pillars, South Africa maintains a sizeable Sheila Abrahams, Senior Consultant, Johannesburg Stock Exchange lead because of its much deeper George Asante, Head of Global Markets, Absa Regional Operations capital and foreign exchange markets. Nigeria, Botswana and Omobolanle Adekoya, Partner and Head, Capital Market Accounting and Consulting Services, PwC Nigeria Namibia round off the top five. All three score above 50 in nearly all Arnold Bagubwagye, Deputy Director, Bank of Uganda pillars. Namibia loses points from Sunil Benimadhu, Chief Executive, Stock Exchange of Mauritius its failure to align with international José Miguel Cerdeira, Economist, Banco de Fomento Angola contractual standards, while Jeff Gable, Chief Economist, Absa Group Limited Nigeria’s lack of a unified exchange rate system pulls down its score. Ingrid Hagen, Vice-President of Strategic Projects, Frontclear Jacqueline Irving, Senior Sector Economist, Sector Economics and  Overall performance in Pillar Development Impact Department, International Finance Corporation, 1: Market depth deteriorated, World Bank Group partly because of the impact of Garth Klintworth, Head of Global Markets, Absa Group Limited Covid-19 on market capitalisation and activity. On average, countries’ George Kwatia, Tax Partner, PWC Ghana scores dropped by 0.6 from last Vipin Mahabirsingh, Managing Director, Central Depository year. Despite this, certain countries & Settlement Co. Ltd., Mauritius showed improvement. Seychelles’ Moremi Marwa, Chief Executive, Dar es Salaam Stock Exchange P–lc Merj exchange attracted additional Prosscovia Nambatya, Corporate Finance Lawyer listings, leading it to be only one Birgit Reuter, Financial Officer, Global Macro and Market Research of three countries where market Department, International Finance Corporation, World Bank Group capitalisation increased over the year. The Stock Exchange of Peter Werner, Senior Counsel, International Securities and Derivatives Association Mauritius amended its trading rules to open its market to international central securities depositories. We also thank individuals from the following institutions: Bank of Mauritius, Bank of Namibia Financial Markets Department, Mauritius Uganda launched its new primary Commercial Bank, and Merj Exchange. dealer system designed to encourage secondary market activity

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

With support from Danae Kyriakopoulou, Chief Economist and Director of Research, OMFIF Brendan Kiy, Research Assistant, OMFIF Natalia Ospina, Research Assistant, OMFIF

10 | Absa Africa Financial Markets Index 2020 and price discovery. highest level of pension assets per to its insolvency laws, making capita in the index. Eswatini, a new allowances for close-out netting.  Ghana rises the most in Pillar addition to the index, has the largest Uganda has adopted the GMRA and 2: Access to foreign exchange pension funds relative to the size of is reviewing insolvency laws to make with its foreign exchange liquidity close out netting enforceable. increasing, as measured by interbank its local market, which shows the potential available for local investors foreign exchange turnover. Angola  Although the pandemic disrupted implemented rules to route to propel market development. markets, it presented opportunities more foreign currency through Survey respondents highlighted for capital market development. its commercial banks. Survey a number of successful financial The African Development Bank respondents said efforts in Nigeria inclusion initiatives such as Angola’s issued coronabonds in March to help to unify its multiple exchange rates Kwenda project and Mauritius finance Covid-19 response measures. and South Africa’s easing of capital and Nigeria’s embrace of fintech Other sustainability initiatives are controls for the broader economy companies. gaining momentum, especially in would increase international  Ivory Coast rises one place in Pillar green finance. Nigeria, Kenya and participation in the market. 5: Macroeconomic opportunity. The Egypt are among countries that have issued sovereign green bonds in the  Collectively, countries perform best West African nation has one of the past year. Rwanda is establishing in Pillar 3: Market transparency, brightest growth outlooks and is one a green investment bank, while tax and regulatory environment of five countries where economic Uganda plans to develop a fund where the average score is 67. growth has averaged above 5% over for post-disaster environmental Morocco gained additional corporate the last five years. South Africa restoration. ratings from international ratings reclaims the top spot. Despite its agencies and a higher score for worsening growth outlook, it has a protection of minority shareholders. low non-performing loans ratio and Kenya‘s Capital Markets Authority relatively low external debt to GDP introduced rules for share buybacks, ratio. potentially encouraging market  Ghana climbs five places in Pillar activity. Angola’s first tax treaty, 6: Legality and enforceability which it signed with Portugal, came of standard financial markets into force. master agreements. Ghana has

 Namibia leads Pillar 4: Capacity of made the Global Master Repurchase local investors. Its pension funds Agreement mandatory for repos and have shown rapid growth in recent introduced rules to enforce close- years and the country now has the out netting. Nigeria made changes

Absa Africa Financial Markets Index 2020 | 11 Highlights 2019-20

Sustainable financial markets The Banco Nacional de Angola adopted a foreign exchange electronic Nigeria and Kenya innovate with sovereign green bonds trading system to bring Nigeria is set to launch its third sovereign green bond. Kenya issued its first green bond in 2019, with proceeds used to finance sustainable greater efficiency and student housing in Nairobi. The government has introduced financial transparency to its foreign incentives to invest in such bonds, with investors exempt from paying exchange market. withholding tax on interest earned. Egypt issued a green bond in September, the first in the Middle East and North Africa.

Coronabonds made in Africa The African Development Bank sold the world’s largest social bond 120%: in March, a set of $3bn three-year bonds to help finance the fight Oversubscription against Covid-19. The AfDB also joined the Nasdaq Sustainable Bond Network in June. of Cameroon’s

Sustainable stock exchanges Cfa25bn issue of The Johannesburg Stock Exchange is expanding its green bond segment to a sustainability division which will include green, social its first 10-year and sustainability bonds. In October 2019, the stock exchanges of T-bond on the Nigeria and Luxembourg signed a memorandum of understanding to allow cross listing and trading, to help expand the green bond Bank of Central market. African States Private sector takes action market. South Africa’s Standard Bank sold a $200m green bond, the country’s largest sale. Meanwhile, Absa was the first African corporate to issue a social bond. Nedbank, in partnership with AfDB, introduced a sustainable development goals-linked tier 2 bond. Last year, Nedbank The Eswatini Stock became the first bank in South Africa on the JSE to launch a specific Exchange launched an renewable energy bond. automated trading system New vehicles for green growth in east and southern Africa that includes mobile Rwanda and the Coalition for Green Capital are establishing the trading for retail investors. Rwanda Catalytic Green Investment Bank. Uganda plans to create a $200m fund to help finance environmental restoration from natural disasters. The Trade and Development Bank of Eastern and Southern The Namibian Stock Africa has signed a partnership with the French development agency for a $150m line of credit to fund sustainable infrastructure Exchange listed its first in East Africa. The Development Bank of Southern Africa and the bond exchange-traded fund. Green Climate Fund have launched a specialised climate finance facility for South Africa, Namibia, Lesotho and Eswatini. Namibia’s Environmental Investment Fund, designed to counter drought Uganda reformed its effects, secured $8.4m from the UN’s green climate fund. primary dealer system to spur secondary market activity.

12 | Absa Africa Financial Markets Index 2020 Market developments and policy changes boost growth of financial markets across the continent

$3bn: New ceiling The Dar es Salaam The World Bank Stock Exchange issued the first of Botswana’s expanding is developing a government bond mobile trading ever Rwandan issuance programme. platform. franc bond.

€1bn: Sovereign bonds sold by Morocco, evenly split in $594m: Amount raised two tranches of 5.5-year and 10-year bonds. by Ivory Coast from social bonds sold on the West African Economic The Nairobi and Monetary Union $5bn: securities market. Securities Eurobonds sold in Exchange Egypt’s largest- The Nigerian Stock released a ever international Exchange is preparing revamped mobile issuance. to introduce derivatives application for trading. retail investors. Zambia formed a Ethiopia drafted capital markets legislation to create a Senegal is forming a stock market authority state-backed €100m tribunal to that will regulate its stock private equity fund. enhance dispute exchange when it opens. resolution and Lesotho enacted settlement. South Africa is legislation that removing currency requires pension exchange controls. funds to invest Seychelles established the Securities, Commodities and a portion of Derivatives Exchange, listing Ghana adopted their portfolio in both traditional and digital legislation to enforce domestic assets. assets. close-out netting.

The Stock Exchange of Mauritius’ new trading The Reserve Bank of Malawi rules enable links with international central implemented an automated trading securities depositories like Euroclear. system for the Malawi Stock Exchange.

Absa Africa Financial Markets Index 2020 | 13 Pictured: A brilliant round-cut Namibian diamond

Pillar 1: Market depth

14 | Absa Africa Financial Markets Index 2020 Stunted progress

Countries made strides in growing their markets, boosting international activity and linking exchanges, but some initiatives were put on hold due to the pandemic.

Figure 1.1: Figure 1.1: Greater market capitalisation improves Seychelles’ performance 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 Malawi Nigeria Zambia Uganda Senegal Rwanda Lesotho Namibia Ethiopia Morocco Eswatini Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast South Africa Mozambique

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

Sources: National securities exchanges, national central banks, World Federation of Exchanges, Association of African Sources:Exchanges, National OMFIF analysis. securities Note: Category exchanges, scores (LHS) national provide thecentral average banks, of indicator World scores Federation within each category.of The Exchanges,harmonised score Association (RHS) represents of African the average Exchanges, of all Pillar 1 indicatorsOMFIF analysis. and is used Note: to compile Category the total scores for Pillars (LHS)1-6. More provide information the onaverage p.38-39. of indicator scores 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.

Absa Africa Financial Markets Index 2020 | 15 Pillar 1 considers the size and liquidity de Cahora Bassa, Arko Seguros and panic that struck in March and April, of local financial markets, as well as Revimo. Mozambique has one of the and markets have mostly calmed since. the diversity of products available. On smallest markets measured against In South Africa, however, the start of average, countries’ scores dropped by GDP at 3%, but lands in the middle of the pandemic coincided with credit 0.6 from last year. This partly reflects the index for liquidity. ratings downgrades and the country’s the decline in local equity indices as consequent removal from the World Mauritius maintained third place. In markets reacted to Covid-19. Liquidity Government Bond Index. One survey early 2020, the Stock Exchange of was more mixed, as a fall in foreign respondent said the downgrade had hit Mauritius announced it had amended investor activity in equities was partly liquidity in the secondary bond market. offset by central banks and local trading rules to open its market up Sell-offs can increase liquidity, but investors in bond markets. to international central securities depositories such as Euroclear and with many markets depending on Market capitalisation decreased Clearstream. This allows foreign foreign participation for a large across most markets in the index, but investors who invest in debt securities, proportion of their liquidity, less exchanges have remained operational Eurobonds and exchange-traded funds international participation has with staff working remotely during the on the exchange to transfer these hindered market liquidity. To promote virus disruption. In many countries, securities directly via the ICSD to other the functioning of domestic financial initial public offerings were put on investors. The initiative is aimed at markets, some central banks made hold because of the pandemic. This making the market more attractive to use of the unconventional monetary included Lesotho, where the Maseru international investors. Mauritius and policy tools developed over the past Securities Market was set to become South Africa are the only markets in decade. The South African Reserve fully operational with its first two IPOs. the index with such links to ICSD. Bank implemented a programme of Seychelles climbs two places in Pillar purchasing government securities in 1. The country’s Merj Exchange has Money markets the secondary market. The central been successful in lifting the size of its banks of Botswana, Egypt and Ghana Central banks in the region provided equity market since it was rebranded also conducted asset purchases. emergency liquidity to quell market from Trop-x in 2019. Following a The Bank of Central African States, number of listings, equity market which serves Cameroon, undertook capitalisation rose to 89% of GDP purchases in a restricted way to ensure from 21% to give Seychelles the third consistency with rules against direct largest stock market relative to the ‘Some survey monetary financing. size of its economy in the index. It Authorities across the countries remains behind South Africa at 275% respondents said that while policy featured in the index were proactive of GDP and Botswana at 176% of GDP. in supporting money market liquidity. As of mid-2020, the Merj Exchange action had supported They did so in different ways, but hosts 41 listed companies, up from finance and liquidity common policies included reducing 25 in the same period last year, with more broadly, it had repo rates, widening collateral financial instruments available in less of an impact accepted for central bank lending dollars and euros. Earlier this year, the on equity markets facilities, and reducing liquidity and exchange launched a direct access capital requirements for banks. Survey model, which it says limits the need where liquidity was respondents said authorities had for brokers and has incorporated dependent on foreign overall successively managed the distributed ledger technology into investors.’ early stages of the crisis. However, its trading infrastructure. Survey some said that while policy action had respondents highlighted several supported finance and liquidity more factors that could further lift broadly, it had less of an impact on liquidity and international activity equity markets where liquidity was in Seychelles’ capital market, such dependent on foreign investors. as regulatory co-operation in the Central banks continue with efforts International Organisation of Securities to build yield curves in domestic Commissions. government securities that can be Bolsa de Valores de Mocambique is used as the basis for pricing for other another smaller exchange that has assets. The South African Reserve Bank been expanding. It has 11 listed proposed in June replacing the South equities, up from eight last year and African benchmark overnight rate with six in the 2018 edition of the index. the South African rand overnight index New listings include Hidroeléctrica average, known as Zaronia, which is an

16 | Absa Africa Financial Markets Index 2020 unsecured overnight rate. Figure 1.2: Market size and liquidity Botswana is doubling its T-bill auctions to eight per year from quarterly to Equities Bonds assist market price discovery. In combination, it will issue standardised Turnover of Total sovereign Total turnover in Market equities, % and corporate bond market, % three- and six-month T-bills. The capitalisation, of market bonds listed on of listed bonds Bank of Botswana has extended the % of GDP capitalisation exchanges, $bn outstanding collateral pool for its lending facilities to corporate bonds listed on the South Africa 275.4 33.4 209.2 301.3 Botswana 178.4 0.3 1.6 16.4 Botswana Stock Exchange. Seychelles 88.6 1.2 0.3 46.0 Uganda is nearing completion of its Morocco 45.2 10.7 0.5 6.3 primary dealer reforms. In September, Mauritius 42.4 6.6 1.2 2.3 Rwanda 35.6 0.1 0.6 4.7 the central bank appointed seven Senegal 29.1 2.1 8.8 0.6 commercial banks that will be able to Malawi 27.9 1.7 0.4 0 take part in competitive bids above Kenya 20.0 7.8 20.4 27.5 a certain size in the primary market. Namibia 17.6 1.7 4.0 3.1 Other commercial banks will still be Uganda 16.4 0.1 3.1 0.0 able to access the primary market, but Ivory Coast 15.7 2.1 8.8 0.6 Zambia 14.6 0.8 3.8 4.5 only for smaller bids. Ghana 13.7 0.7 19.6 90.6 Egypt 12.1 35.4 76.1 31.4 Linking exchanges Tanzania 10.3 4.6 5.2 15.2 Nigeria 7.7 8.2 65.7 94.3 The Africa Exchange Linkages Project Eswatini 4.7 1.3 0.4 0 offers new opportunity to link Mozambique 3.0 1.9 0 0 African exchanges and boost cross- Cameroon 1.1 0.5 1.3 0 border activity. In April, it began Ethiopia - - 0 0 procurement for an order-routing Angola - - 7.5 31.8 technology platform to enable a Lesotho - - 0 0 broker on one exchange to channel a Source: Refinitiv, national stock exchanges, national central banks, World Federation of Exchanges, the Association of African Exchange, OMFIF analysis client’s buy or sell order to a broker on a second exchange where a target security is listed. The AELP is a joint initiative by the African Securities Exchanges Association and the African Figure 1.3: Seychelles, Malawi and Cameroon trump decline in equity Development Bank to encourage market capitalisations pan-African investment flows. It is Market capitalisation, % of GDP funded by the Korea-Africa Economic Co-operation Trust Fund through the 350 African Development Bank. 300 Pilot exchanges that are participating in the project include: Bourse 250 Régionale des Valeurs Mobilières, 200 Casablanca Stock Exchange, the Egyptian Exchange, Johannesburg 150 Stock Exchange, Nairobi Securities 100 Exchange, the Nigerian Stock Exchange, and Stock Exchange of 50 Mauritius. 0 i l i t a a a a i i c es us w ya ue da na i l

Cameroon’s Douala Stock Exchange n l r n q a n Egy p A f h e Ke merged with the regional Bourse G h c Angola Niger Zambia Mal a mb i Uganda Seneg a Rw a Namibia Eswa� n a Tanza Morocco

des Valeurs Mobilières de l’Afrique Mauri � Botswa n Se y Cameroon Ivory Coast South

Centrale last year, raising its equity Mo z market capitalisation to 1.1% of GDP. Mid-2019 Mid-2020 This earns Cameroon extra points for Sources: National securities exchanges, national central banks, World Federation of Exchanges, market size, though it loses roughly Association of African Exchanges, OMFIF analysis the same amount for market liquidity.

Absa Africa Financial Markets Index 2020 | 17 Pictured: Dewdrops on a South African sunflower

Pillar 2: Access to foreign exchange

18 | Absa Africa Financial Markets Index 2020 Easing restrictions

Loosening capital controls has improved liquidity in some foreign exchange markets, but further easing is needed to encourage greater activity.

Figure 2.1: Active foreign exchange market improves Ghana’s standing Figure 2.1: Active foreign exchange market improves Ghana’s standing Scores for Pillar 2 indicators, max=400; harmonised score, max=100 (RHS) Scores for Pillar 2 indicators, max=400; harmonised score, max=100 (RHS)

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0 0 Egypt Kenya Ghana Angola Malawi Nigeria Zambia Uganda Senegal Rwanda Lesotho Namibia Ethiopia Morocco Eswatini Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast South Africa Mozambique

Net portfolio investment to reserves Interbank foreign exchange turnover Foreign exchange 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) represents the average of all Pillar 2 indicators and is used to compile the total scores for Pillars 1-6. MoreSources: information International on p.38-39. Monetary Fund, national central banks, OMFIF analysis. Note: The harmonised 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 2020 | 19 Pillar 2 evaluates African markets’ local assets spurred market activity. interbank market. Angola introduced openness to foreign investment based Egypt’s interbank exchange turnover new rules at the beginning of the on the ease of moving capital, liquidity spiked in March to $15.3bn, five year that encouraged oil companies of foreign exchange markets, rigidity times higher than its average monthly to sell foreign exchange directly to of foreign exchange regimes and turnover of $3bn in 2019. commercial banks. availability of reliable foreign exchange South Africa has the highest interbank These companies will become data. It considers countries’ resilience foreign exchange turnover by a large another source of foreign currency to volatility by measuring portfolio margin, despite the fact it has been for commercial banks and reduce flows against foreign exchange the market’s reliance on the Banco reserves. Since the first edition of on a steady decline for the last several Nacional de Angola. This has been the index in 2017, several countries years. Turnover was $929.3bn in 2019, undertaken alongside the introduction have loosened capital controls and helping the country maintain top place in Pillar 2. of Bloomberg trading infrastructure to moved towards more flexible exchange automate transaction processes on the regimes. Nearly half the countries in the index foreign exchange market. The reforms On average, scores in this pillar were have markets with negligible interbank should encourage greater trading in largely unchanged. Generally, countries foreign exchange turnover, with the interbank foreign exchange market. maintained strong reserve positions, central banks playing a large role in although there was more variability in allocating foreign currencies. Some Portfolio flows and reserves are taking measures to promote the foreign exchange activity. Fluctuations in the ratio of portfolio An increase in foreign exchange flows to foreign exchange reserves led liquidity and a lower ratio of portfolio to several ranking changes. A higher flows to reserves lift Ghana five ratio indicates potential difficulty places in Pillar 2. The country’s for central banks in meeting foreign ‘Nearly half the currency demand from investors. interbank foreign exchange turnover countries in the index has been climbing steadily since it A fall in net portfolio flows in Namibia loosened surrender and repatriation have markets with reduced the ratio to reserves to 3.4% requirements for exporters in 2016. negligible interbank from 8.9%, boosting the country’s The reforms direct more foreign foreign exchange ranking in this pillar by three places. currency through the commercial turnover, with central Rwanda ranks third, climbing one place banking system rather than through banks playing a large due to a 61% increase in its reserves to the central bank. Total interbank $1.4bn, which reduced its ratio to 0.9% turnover reached $25.5bn in the 12 role in allocating from 2%. months to March, the third highest in foreign currencies.’ the index. Interbank turnover excluding Angola moves up one place following central bank transactions gives a gauge an improvement in its reserve position. of local foreign exchange liquidity in In 2019, its foreign exchange reserves the two-way market. Active interbank climbed to $16.3bn from $15.4bn. markets are an important enabler and Its net portfolio investment came down as greater acquisition of foreign source of pricing for broader derivative assets increased. After being hit badly products whose prices are linked to by the 2014 oil price decline, Angola market exchange rates. had readjusted and been running Banks based in Morocco traded current account surpluses since 2018. $18.6bn of foreign currency in the A halving in the value of the kwanza 12 months to June, double from the against the dollar over the last three previous year. This was despite a drop years helped in this regard. in liquidity between March and April This year’s oil price shock has not as a seize-up in general trade led to been kind to Angola or its exchange lower demand for foreign currency. The rate. The Angolan kwanza dropped country’s ranking remains constant 25% between January and September. as its boost from foreign exchange One respondent from Angola said turnover offset a decline in score for that the Covid-19 crisis and oil price its ratio of portfolio flows to reserves. crises ‘put immense pressure on the Covid-19 had a mixed impact on exchange rate and prevent both the foreign exchange turnover. While it authorities and international players declined in Morocco, it increased in from undertaking any risky or complex markets such as Egypt as sell-offs of transactions’. The largest depreciation

20 | Absa Africa Financial Markets Index 2020 Figure 2.2: Ghana, Zambia and Angola went into crisis with stronger FX positions NetFigure portf olio2.2: investment Ghana, Zambia to reserves, and % Angola went into crisis with ‘The largest stronger FX positions relative to net portfolio investments depreciation has been Net portfolio investment to reserves, % in Zambia, where the

150 87 kwacha has fallen 40% 60 against the dollar amid a shortage of dollars 50 resulting from lower copper exports.’ 40

30

20

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0 Egypt Kenya Ghana Angola Malawi Nigeria Zambia Uganda Senegal Rwanda Lesotho Namibia Morocco Eswatini Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast South Africa Mozambique 2018 2019

Sources: International Monetary Fund, national central banks, OMFIF analysis

Sources: International Monetary Fund, national central banks, OMFIF analysis

has been in Zambia, where the kwacha countries in the index grew foreign rates would be key to unlocking greater has fallen 40% against the dollar amid exchange reserves by 5% to $256.6bn international activity in the market. a shortage of dollars resulting from in 2019. In February, South Africa’s finance lower copper exports. Ratings agencies Mauritius has high net portfolio ministry announced changes to its expect both countries will need to investment but is less vulnerable foreign exchange system that will ease renegotiate external liabilities. to foreign exchange fluctuations approval processes for foreign currency Most index currencies have depreciated despite the high ratio to reserves. The transactions. While prudential limits against the dollar, with an average significant inward flow is due to its on domestic banks and institutional depreciation of 8% across the index position as a favourable domicile for investors remain, these caps will be between January and September. The investment funds, often comprised of reviewed periodically. exceptions have been countries with international money invested globally. In September, the WAEMU delayed the pegs to the euro: Ivory Coast, Senegal planned launch of its new currency, and Cameroon, where currencies have Capital controls and currency the eco. The eco will keep many of strengthened. regimes the characteristics of the CFA franc, Since the onset of the pandemic, Both Nigeria and South Africa took including its peg to the euro and free foreign exchange reserves have important steps over the last 12 convertibility guaranteed by France. largely held up for those countries months to make their market more However, there will be less French with timely data available. Prior to accessible to international investors. oversight. the virus outbreak, large annual The governor of the Central Bank of increases in reserves were recorded Nigeria said in June that the country in a number of index countries. Ghana will continue to pursue unification and Mozambique raised reserves by of its various exchange rates. One 20%, while the West African Economic survey respondent in Nigeria said and Monetary Union increased by 18% foreign exchange stability through the and Mauritius by 15%. Collectively, convergence of different exchange

Absa Africa Financial Markets Index 2020 | 21 Pictured: Coils of Copper wire from a Zambian mine

Pillar 3: Market transparency, tax and regulatory environment

22 | Absa Africa Financial Markets Index 2020 Supportive regulatory environment

Most index countries have tax systems that promote capital market development. Many have adopted the International Financial Reporting Standards, though some lack audit capacity and transparency.

FigureFigure 3 3.1:.1: Nigeria Nigeria improves improves ranking ranking with greater with greaternumber of number corporates of corporatesrated rated ScoresScores for Pillar 3 categoriescategories,, max=800;max=800; harmonised harmonised score, score, max=100 max=100 (RHS) (RHS)

700 100 90 600 80 500 70 400 60 50 300 40 200 30 20 100 10 0 0 Egypt Kenya Ghana Angola Malawi Nigeria Zambia Uganda Senegal Rwanda Lesotho Namibia Ethiopia Morocco Eswatini Tanzania Mauritius Botswana Cameroon Seychelles Ivory Coast South Africa Mozambique Financial stability regulation Reporting and accounting standards Tax environment Financial information availability Market development Corporate action governance structure Protection of minority of shareholders Existence of credit rating Pillar 3 harmonised score (RHS) Source: Bank for International Settlements, International Financial Reporting Standards, Deloitte International Accounting Standard Plus, World Bank, Standard & Poor’s, Moody’s, Fitch, GCR Ratings, 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 3Source: indicators Bank and isfor used International to compile the Settlements,total scores for PillarsInternational 1-6. More informationFinancial Reportingon p.38-39. Standards, Deloitte International Accounting Standard Plus, World Bank Doing Business, Standard & Poor’s, Moody’s, Fitch, GCR Ratings, 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 Pillars 1-6. More information on p.38-39. Absa Africa Financial Markets Index 2020 | 23 A healthy market environment is 3, but may be nearing an inflection key to attracting capital. Pillar 3 Figure 3.2: Ghana offers point. One survey respondent said the scores countries based on regulatory investors generous tax rates country’s capital market development frameworks, tax systems and market Witholding tax rates, % initiatives were beginning to bear fruit transparency. Overall, countries perform in the form of a friendlier and simpler Interest Dividends best in this pillar, scoring 67 out of 100 tax system. Along with Ivory Coast, Ghana 8 8 on average. This is unchanged from last Ivory Coast 10 10 Angola has tax discounts on income year, but has improved from 63 in the Ethiopia 10 10 from longer-term government bonds, inaugural 2017 edition of the index. Morocco 10 15 which could help bond market activity Namibia 10 20 and foster the formation of a yield Morocco rises six places, gaining points Nigeria 10 10 curve against which other assets can be for additional corporate ratings from Tanzania 10 5 priced. Angola’s first tax treaty, which international ratings agencies as well as Eswatini 10 12.5 it signed with Portugal, came into force for a higher score for the protection of Botswana 15 7.5 in late 2019. It is no longer the only minority shareholders. As of September, Kenya 15 15 country in the index without a double there were nine corporate ratings, a Mauritius 15 0 Rwanda 15 10 taxation agreement. new high for Morocco since the index Seychelles 15 15 began. The World Bank has highlighted South Africa 15 20 Accounting standards Morocco’s progress in strengthening Uganda 15 15 minority investor protection through Angola 15 10 There is wide adoption of International ‘expanding shareholders’ role in major Senegal 16 10 Financial Reporting Standards across transactions, promoting independent Cameroon 16.5 16.5 the index countries, with most requiring Egypt 20 10 directors, increasing transparency listed firms to report according to Mozambique 20 10 IFRS. The lowest-scoring countries for on directors’ employment in other Zambia 20 20 companies, and making it easier to Malawi 20 10 accounting standards are Ethiopia and request general meetings’. Lesotho 20 25 Seychelles, but it is an area of focus among business leaders and policy- Kenya climbs two places after scoring Source: Deloitte, OMFIF analysis. Note: WHT may be reduced under applicable tax makers in both. Larger corporates in better in corporate governance treaties. Where applicable, the rate shown is for Seychelles are gradually taking up the non-residents structure. The Kenyan Capital Markets IFRS, and major banks and insurers have Authority issued guidance allowing already adopted these standards. In listed firms to purchase their own 2018, Ethiopia gave banks three years shares. These share buybacks, which Both have low levels of withholding to transition to IFRS from Generally can help encourage stock market taxes and a high number of double Accepted Accounting Principles. Wider activity, boost the country’s score in taxation treaties with other countries. roll-out is planned for non-financial this indicator. Mauritius generally has no withholding firms and small- and medium-sized tax on dividends, but some are specified enterprises. Tax environment in tax treaties. Covid-19 is making it challenging to Tanzania and Ethiopia score highly for Survey respondents in Ghana said its meet financial reporting requirements. their low rates of withholding tax on tax system was ‘broadly supportive’ of IFRS 9, which came into effect in 2018, income from interest and dividends, capital market development. Ghanaian requires banks to estimate expected with Tanzania improving its score by regulators are using tax breaks to credit losses based on historic, current levying a lower rate of withholding tax develop new market segments. From and forecasted economic conditions. for dividends paid out by listed firms. The uncertain environment makes In Tanzania, the rate of withholding tax this year, the fees charged by a local this more difficult and may exacerbate falls to 5% for dividends from listed fund manager for the management of problems in fulfilling capital adequacy firms compared with 10% for unlisted a licensed private equity fund, venture requirements. firms. Mozambique has taken a similar capital fund or mutual fund are exempt approach. Dividends from listed firms from value-added tax and the country’s Even with higher standards in place, are subject to a 10% withholding tax health and education levies. Private survey respondents often cited a rather than the unlisted rate of 20%. equity is increasingly being viewed as lack of audit capacity as a barrier to Ethiopia has a low withholding tax rate a means to provide capital to smaller improvements in financial transparency. of 10% on dividends and has the sixth- firms and create a pipeline of companies Other respondents noted that their highest number of tax treaties in the that can list on stock exchanges. Gains markets do not tend to have a culture of index with 18. from the realisation of securities listed transparency. on the Ghana Stock Exchange are On the measures used in this survey, Across the index countries, survey exempt from tax until next year. Morocco and Mauritius offer the most respondents said that major financial attractive tax environments overall. Angola maintains a low ranking in Pillar institutions, often subject to additional

24 | Absa Africa Financial Markets Index 2020 oversight by a specialised regulator, had the index countries, which has created include Datapro and Agusto & Co, which high standards of financial reporting opportunities for African agencies such are both focused mostly on Nigerian and audit capacity. Reporting varies as Johannesburg-based GCR. Most of firms. The methodology for this year’s more in quality for non-financial GCR’s ratings are for South African index incorporates local ratings activity, corporations. corporates, but it has also rated firms in awarding additional points for countries While some countries have high Kenya, Tanzania, Ghana, Botswana and with corporate ratings from African accounting standards, firms may need Uganda. Other African ratings agencies agencies. to improve their communication on financial results. One respondent in Uganda said: ‘The lack of press release, investor presentation and a narrative section in the annual statements makes it impossible for recipients of the data to make informed investment decisions.’ ‘International ratings agencies generally The quality of financial reporting in do not have a local presence in the Mauritius and Tanzania was praised. index countries, which has created Both rank highly in this pillar overall. One respondent in Mauritius said the opportunities for African agencies.’ next step for regulators should be to look at making financial reporting using XBRL, the globally recognised format for digital accounts filing, more efficient. Figure 3.3: South Africa and Nigeria lead in corporate ratings ‘It should be possible to generate the XBRL file directly from a company’s Number of corporates rated by ratings agencies accounting system and upload it to the database of the registrar of companies.’ International ratings Regional This would make the process of agencies ratings agency collecting data and converting them Fitch Moody's S&P GCR into reports for regulators and other end-users more efficient, increasing South Africa 18 45 30 274 market transparency. Nigeria 16 12 10 126 Mauritius 7 19 5 3 Corporate ratings Morocco 8 1 0 0 Nigeria and South Africa lead Pillar 3 overall, and both stand out in the Kenya 4 3 0 52 number of credit ratings for their Angola 2 3 1 0 corporates. Nearly all index countries Namibia 3 2 0 6 have a sovereign rating from one of Uganda 2 1 0 9 the three major international ratings agencies. However, with the exception Zambia 2 1 0 4 of a handful of countries, corporate Egypt 3 0 0 2 ratings from international ratings Ghana 1 1 0 11 agencies are scarce. Botswana 0 2 0 9 While South Africa, Nigeria and Rwanda 1 0 0 5 Mauritius have 93, 38, and 31 corporate ratings from international ratings Cameroon 1 0 0 1 agencies, respectively, all other index Senegal 1 0 0 0 countries are in single figures. For Tanzania 0 0 0 12 some, the number of ratings has grown slightly. Kenya has seven corporate Malawi 0 0 0 3 ratings, up from five last year. Uganda Mozambique 0 0 0 3 has three, up from two last year, which Ivory Coast 0 0 0 2 contributed to its rise of three places in Pillar 3. Eswatini 0 0 0 1

The international ratings agencies Source: Refinitiv, OMFIF analysis Note: Ethiopia, Lesotho and Seychelles have no ratings generally do not have a local presence in

Absa Africa Financial Markets Index 2020 | 25 Pictured: A spool of Nile River Valley cotton thread

Pillar 4: Capacity of local investors

26 | Absa Africa Financial Markets Index 2020 Long-term assets propel capital market development

Pension funds are an important source of capital and liquidity for local markets, but their size varies widely across the index countries.

Figure 4.1: Namibia’s tops pillar with high concentration of pension assets

Scores for Pillar 4 indicators, max=200; harmonised score, max=100 (RHS)

Note for Will: Could you please swap the two categories – pension fund AUM should be on Figuretop. (4.1:Exce l Namibiawon’t let m topse do th pillaris.) tha nkswith -KU high concentration of pension assets Scores for Pillar 4 indicators, max=200; harmonised score, max=100 (RHS)

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0 0 i a a o pt wi ue ria les ola ana q e egal opia itius ati n oc c roon e l otho anda mbia b i i g Eg y Afri c ganda Kenya Gha n s w nzania amibia An g Mal a N Z a U Se n R w ry Coast Le s N Eth i Mo r th Es w T a Mau r Bo t Cam e Seyc h Iv o So u Moza m

Pension fund AUM per capita Pension assets to domestically listed assets, accounting for market activity Pillar 4 harmonised score (RHS)

Sources: African Development Bank, Organisation for Economic Co-operation and Development, International Monetary Fund, national securities exchanges, national central banks, national 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. Note for Will: Could you please swap the two categories – pension fund AUM should be on top. (Excel won’t let me do this.) thanks -KU

Sources: African Development Bank, Organisation for Economic Co-operation and Development, International Monetary Fund, national securities exchanges, national central banks, national 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 2020 | 27 ‘Total assets are Local investors’ willingness to last year. This allocation is likely to invest in domestic markets can go down, as Namibian funds are now nearly twice the have a significant impact on market required to allocate at least 45% of size of local market development and growth. Pillar 4 their portfolios to domestic assets. measures local investor capacity based Among index countries, there is high capitalisation, on the amount of pension fund assets disparity in the amount of pension indicating that available in the country relative to the fund assets relative to the size of the population and market capitalisation. Namibian pension population. Mauritius, South Africa, Countries tend to perform poorly in Seychelles and Eswatini have pension funds can play an this pillar, especially if their pension assets per capita exceeding $1,000. systems are not yet well established. important role in Morocco is just below at $938, while all However, this pillar shows the greatest spurring market improvement from last year, with other countries are significantly lower; activity.’ country scores climbing by 3.2 on 12 have pension assets per capita average due to growing pension below $100. assets. Pension funds and other institutional Namibia tops Pillar 4. Its pension investors can play a significant role assets rose on the back of strong in capital market development. Not market performance in 2019. Pension only do they become large sources of assets per capita climbed 9.6% year- capital, their long investment horizon on-year to $4,582 at the end of 2019. allows them to move away from Total assets are nearly twice the size of government bonds and bank deposits local market capitalisation, indicating towards investments such as equities that Namibian pension funds can play and corporate bonds, providing local an important role in spurring market markets with liquidity. They are an activity. High exposure to overseas important source of liquidity for local markets suggests Namibian pension government debt, reducing reliance on funds will be partly insulated from external finance. worsening local economic conditions, Survey respondents across the index as they invested 58.3% of their markets said pension funds remain aggregate portfolio to foreign assets limited in their ability or desire to invest beyond listed equities and government bonds. One respondent in Nigeria said local government bonds FFigureigure 4. 24.2:: Nam Namibiaibia has large hass tlargest pension ppensionool relati vpoole to p relativeopulation to population offer high returns, reducing the need PPensionension fund fund AUM AUM per per capita, capi t$a, $ to invest in higher-earning or riskier assets. In markets such as Ethiopia, 4,500 pension funds are required to invest 4,000 a large portion of their securities in local government debt. In Kenya, one 3,500 respondent said pension investment 3,000 practices were improving, but conflicts between pension fund trustees and 2,500 external managers tend to hamper 2,000 longer-term approaches to investment. 1,500 Pension assets and local markets 1,000 Pillar 4 also considers the size of the 500 pension market relative to the local 0 listed market to give an indication of i i l t t s s a a a a a a a a o o ia l ia ia i i s p y e w c u d n on r l g a p n b ti n t h l a a n n a n que which countries could engage their e o l e g o i it i a o c r e o e a nd i o h m b z a n r b i g s Eg y h K Co a G A fr i c n u r am i e A n c M a N Z a ts w y pension funds further in capital market Ug a m e S R w y L e N Et h M o Es w T a

e M a za m B o C a vo r S out h

I development. Eswatini, a new addition S M o to the index, has the highest pension

SSources:ource sNational: Sou rcentralces: Nbanks,atio nationalnal ce financialntral bregulators,anks, n pensionation aindustryl fina tradencia bodies,l regu nationallators finance, pen ministries,sion ind Africanustry assets to local market capitalisation trDevelopmentade bodi eBank,s, n Organisationational fi forna Economicnce mi nCo-operationistries, A andfri Development,can Devel opInternationalment B Monetaryank, Or Fund,gan OMFIFisati analysison for ratio. Its pension fund assets are Economic Co-operation and Development, International Monetary Fund, OMFIF analysis three times the size of domestic listed

28 | Absa Africa Financial Markets Index 2020 assets. The country’s pension funds Figure 4.3: Eswatini pension funds can boost local market activity invest 42% of their assets locally, Figure 4.3: Eswatini pension funds can boost local market activity Pension fund assets, % of listed securities which shows they are a leading source Pension fund assets, % of listed securities of capital and liquidity for the local 350 market. Only 3% of Lesotho’s pension fund 300 assets are invested domestically, 250 with the remainder making its way to markets in Johannesburg. In 2019, 200 Lesotho introduced a regulatory framework for pension funds, moving 150 oversight to the central bank and requiring a portion of pension funds to 100 be invested in Lesotho to develop the domestic capital market. 50

While this indicator gauges the extent 0 i t t s s a a a a a a a e o l al p e u i c l g o b i b i y l a w n y ana i nda q to which pension funds can propel oo n an i iti u atini g r oc c e hana an d a a l r n e r b i e E h e a m g K Co a s w G Af r o An g c M Nigeria Z y ts w s U an z capital market development, low a u S e R w y r Na m M t h E a m T M z u B o Ca m v o S e o market liquidity can prevent pension I S o funds from investing in local assets and M Sources: National central banks, national financial regulators, pension industry trade bodies, national finance ministries, African encourage them to adopt buy-and-hold SourDevelopmentces: Nati Bank,ona Organisationl central forba Economicnks, n aCo-operationtional fi nandan Development,cial regu Internationallators, p eMonetarynsion Fund, ind nationalustry securitiestrade b odies, strategies or invest internationally. For natioexchanges,nal fin aOMFIFnce analysisministries, African Development Bank, Organisation for Economic Co- this reason, a local liquidity weighting operation and Development, International Monetary Fund, national securities exchanges, is applied to pension fund assets. OMFIF analysis Morocco and Mauritius score highly because they have a high ratio of financial inclusion survey undertaken makes it easier for new payments firms pension fund assets relative to their every four years. It found that 93% of to provide services to existing bank local market, and because their local Rwandan adults have access to formal account holders, creating opportunities market is relatively liquid. services such as bank accounts and for fintech firms. mobile payments, and informal ones A professional services firm in Mobilising local savings such as savings groups. This is up from Nigeria said fintechs had helped 89% in 2016 and 72% in 2012. The Policies that support financial inclusion improve access to finance for small and encourage long-term savings help government aims for all adults to be and medium-sized enterprises. ‘The bolster the capacity of domestic capital formally included by 2024. More and [fintech] industry has revolutionised available for investment, and contribute more employers are paying wages into the administration of loans to to broader development goals. Survey accounts, which is driving bank account consumers with SMEs leveraging on respondents in all index countries use. Education and information were technology,’ they said. ‘This has created reported a high use of payments highlighted as key to improving mobile healthy competition for commercial accounts, including both formal and accounts take up. banks that are only now fast becoming informal sector workers. However, In February, Kenya launched Treasury active players by establishing business longer-term savings products such as Mobile Direct, allowing more of the units focused on financial inclusion and savings accounts, pension plans and retail investment market, banked and SME customers.’ insurance are not as popular. unbanked, to access the government Digital and mobile platforms are In Angola, a project designed to bond market. The Nairobi Securities proving to be important tools during transfer money to low income Exchange launched a mobile application the Covid-19 disruption, especially households launched earlier this year in June to increase local and foreign in enabling the delivery of financial brought more individuals into the investor participation in the market. services. Central banks, financial financial system. One respondent said: The application is expected to pave institutions and technology firms ‘The Kwenda project, which provides the way for other institutions to use should continue working together to money transfers to poor people in rural digital platforms such as brokers and provide innovative means of access regions, is improving financial inclusion investment banks. to widen participation in the formal by contributing to the engagement of Mauritius launched its MauCAS financial system, whether through these people with the financial system, payments system, which routes saving, investing or accessing credit. some of them for the first time.’ transactions made through cards and In May, the National Bank of Rwanda mobile phones for settlement at the published the results of a wide-ranging Bank of Mauritius. The new system

Absa Africa Financial Markets Index 2020 | 29 Pictured: The shimmering metallic scales of a Tilapia fish

Pillar 5: Macroeconomic opportunity

30 | Absa Africa Financial Markets Index 2020 Bouncing back from crisis

In the light of the pandemic, most economies are likely to contract this year. However, some will recover more strongly than others, particularly those that are less dependent on oil and commodities exports or global tourism.

Figure 5.1: South Africa regains tough spot despite economic struggles Figure 5.1: South Africa regains top spot despite economic struggles Scores for Pillar 5 indicators, max=800; harmonised score, max=100 (RHS) Scores for Pillar 5 indicators, max=800; harmonised score, max=100 (RHS)

800 100

700 90 80 600 70 500 60 400 50

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

GDP growth Living standards Growth and absolute export market share Quality of banks Debt profile Macroeconomic data standards Monetary policy committee outcomes transparency Budget release Pillar 5 harmonised score (RHS)

Source: International Monetary Fund, World Bank, national central banks, national finance ministries, African Development Bank, OMFIF analysis. Note: The harmonised score (RHS) represents the average of all Pillar 5 indicators and is used to compileSour thece total: Int escoresrnati oforna Pillarsl Mon 1-6.etary More Fun informationd, World B onan kp.38-39., national central banks, national finance ministries, African Development Bank, OMFIF analysis. 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 2020 | 31 Pillar 5 assesses countries’ badly hit by Covid-19. This is due to determining countries’ vulnerability to macroeconomic performance, export the fact it is not heavily dependent on crises that affect global financing and competitiveness and banking sector oil exports and tourism. Its healthcare economic conditions. Eswatini, a new health. It evaluates the quality of system performs well on the Global addition to the index, has low public governance based on external debt Health Security Index, indicating that sector external debt at 11.7% of GDP, management and financial sector it may respond to the pandemic better the second lowest in the index for transparency. On average, country than other countries. end-2019. This helps it achieve eighth scores improved by 1.1, subdued partly place in the pillar. Botswana has the The relatively robust growth outlook by adjusted growth forecasts reflecting lowest external debt at 11% of GDP. lifts Ivory Coast one place in Pillar 5. the impact of Covid-19. There were decreases in external debt Tanzania, Ghana, Rwanda and Senegal in Seychelles, Botswana, Ivory Coast and South Africa regains the lead in Pillar all grew more than 5% over the last five Namibia, raising their scores for this 5 this year despite its poor economic years. These countries are expected indicator. performance. Its compound annual to bounce back more strongly than growth rate over the last five years others in 2021 because they are less Three countries had external debt is the lowest in the index at just dependent on oil and commodities above 50% of GDP at the end of 2019. under 1%. The International Monetary exports. Mozambique had the highest external Fund expects South Africa to post debt-to-GDP ratio and last year the weakest recovery of the index Seychelles will probably be one of restructured $900m of Eurobonds. countries over the next two years. High the worst-hit countries. While not a Ratings agencies believe a large living standards, a low ratio of non- commodities or oil exporter, it is more liquefied natural gas project could performing loans to gross loans, and exposed to disruptions in tourism and revive Mozambique’s financial health, large export market share push it to top global trade, which will weigh heavily even in the light of subdued prices. The the pillar. on its economic growth in 2020. This other two countries with external debt impacts its pillar ranking this year, but Most economies are likely to contract above 50% of GDP are Angola, which the IMF forecasts a strong economic this year, but some will recover more had passed the second review of its strongly than others. Ivory Coast ranks rebound for 2021. $4bn IMF economic reform programme second for GDP growth. Over the last before the pandemic struck, and Managing external debt five years it achieved a CAGR of 7.4% Zambia, which is aiming to renegotiate and is forecast to be one of the least External debt is a key factor in its debt with official creditors and has asked private creditors for a rescheduling of payments. The G20 debt service suspension initiative, a debt relief programme FiFiguregure 5. 5.2:2: SStrongtrong reboundsrebounds expected expecte din i nRwanda Rwanda and a nIvoryd Ivory Coast Coast organised by the Paris Club, IMF, World Compound annual growth rate, five-year average and forecast, % Compound annual growth rate, five-year average and forecast, % Bank and African Development Bank, aims to free up money for African 10 countries to spend on healthcare. While 8 many are eligible, only a small number have applied: Cameroon, Ivory Coast, 6 Ethiopia and Senegal. There is a general 4 reluctance to request relief owing to 2 the negative impact this could have on credit ratings and future financing 0 conditions. The IMF has granted short- -2 term emergency funding to 19 of the -4 23 index countries to help sustain finances over the pandemic. -6 n la

es Secondary market Eurobond yields o ho l o ast t nda o ique o for many African countries have b e r Egypt he l g a Kenya C Ghana swana An g Malawi Nigeria Zambia t y U Senegal Rwanda Les o Namibia Ethiopia risen sharply since March, with most Morocco Eswatini a m Tanzania Mauritius B o Ca m Sey c

Ivo r more than doubling. This will present South Africa Mo z difficulties for those trying to roll over 2014-19 2020-21 debts. This shows the importance of developing local capital markets. Having access to both local and offshore Source:Source: International Internation Monetary Fund,a lOMFIF Mo analysisnetary Fund, OMFIF analysis markets is critical in times of stress,

32 | Absa Africa Financial Markets Index 2020 ‘The IMF has Figure 5.3: High external debt leaves certain countries vulnerable to Figcrisisure impact5.3: High external debt leaves certain countries vulnerable to crisis igrantedmpact short-term External debt to GDP ratio, % emergency funding External debt to GDP ratio, % to 19 of the 23 index 100 countries to help 90 sustain finances over 80 70 the pandemic.’ 60 50 40 30 20 10 0 n la es o ho l o ast t nda o ique o b e r Egypt he l g a Kenya C Ghana swana An g Malawi Nigeria Zambia t y U Senegal Rwanda Les o Namibia Ethiopia Morocco Eswatini a m Tanzania Mauritius B o Ca m Sey c Ivo r South Africa Mo z

2018 2019

Source:Source: International Inte rnationMonetary Fund,a OMFIFl Mo analysisnetary Fund, OMFIF analysis

allowing countries more flexibility in for 19.9% of gross loans, down from shown the value of diversification. The their financing sources and decisions. 23.5% in 2018. This diversification index countries collectively exported has helped banks reduce their NPL $424bn in 2019, 12% less than in Banking health ratios. The central banks of Nigeria 2014. This drop can be fully accounted With a sharp downturn in growth, NPL and Botswana both applied regulatory for by Angola and Nigeria, the index’s ratios are expected to surge across the forbearance to NPLs as part of Covid-19 largest oil exporters. Nigeria’s exports index this year. response measures. had been recovering since and continued to increase in 2019, which Before the Covid-19 upheaval, many Angola, the other major oil exporter helps its pillar score. Large and growing countries’ banking systems were in in the index, has done less well in exporters were Ghana, Morocco and strong positions. Egypt, Ethiopia, adjusting to low oil prices. The NPLs Egypt. Ghana is likely to fall back as Mauritius, Namibia, Rwanda, Seychelles, of its banks rose to 32.5% of gross one of its expanding export markets is South Africa and Lesotho had NPL loans at the end of 2019 from 28.3%. oil and gas, but this could be offset by ratios of less than 5% of total loans in The country is undertaking policies flourishing export markets in gold and 2019. A low NPL ratio can help banks to improve the health of its banking cocoa. keep credit open to the real economy system. In June, 80% of non-performing Rwanda and Uganda both have small during a crisis and provide finance for loans of the Savings and Credit export market shares but have been the recovery. Bank, the largest state-owned bank, growing rapidly in recent years. Rwanda were moved to Recredit, an asset Nigeria has the largest decline in its accounts for 0.5% of all exports from management firm set up by the state NPL ratio in the year leading up to end- index countries. This share has doubled to take on NPLs from the banking 2019, down to 6% from 11.7%. Data in the last five years, helped by strong system. This was part of a broader bank from the Central Bank of Nigeria show exports in metals, gold and coffee. restructuring plan that includes partly banks have reduced their lending to the Uganda accounts for 1.6% of index privatising state-owned banks. oil and gas sector and expanded their exports, up from 1% five years ago. lending to agriculture, manufacturing, New entry Malawi has increased its Economic diversification construction and financial services. export share by around one-third with Loans to the oil and gas sector account The latest slump in oil prices has mostly agricultural exports.

Absa Africa Financial Markets Index 2020 | 33 Pictured: Red and gold protea flower petals

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

34 | Absa Africa Financial Markets Index 2020 Inspiring investor confidence through legal certainty

Many countries are refining their legal frameworks to attract foreign investment, with several counties drafting netting legislation.

FigureFigure 6.1: 6.1: Greater Greater adoption adoption of close of close-out-out netting rulesnetting and GMRA rules documentation and GMRA documentationimproves observedoverall performance across countries ScoresScores for for Pillar 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 Malawi Nigeria Zambia Uganda Senegal Rwanda Lesotho Namibia Ethiopia Morocco Eswatini 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:Sources: National National central banks,central ISDA, banks, Frontclear, ISDA, Frontclear,World Bank, OMFIFWorld analysis. Bank Doing Note: BusinessThe harmonised OMFIF score (RHS) represents the averageanalysis. of all Note: Pillar The 6 indicators harmonised and is scoreused to (RHS) compile represents the total scores the average for Pillars of 1-6. all PillarMore information6 indicators on p.38-39. and is used to compile the total scores for Pillars 1-6. More information on p.38-39.

Absa Africa Financial Markets Index 2020 | 35 Alignment with internationally by the Bank of Ghana, which have been is refined. Uganda’s efforts are part recognised legal and contractual continuously updated. of a broader move to GMRA adoption frameworks help mitigate risk and across the East African Community The Bank of Ghana has announced boost investor confidence. Pillar (other index EAC members are Rwanda, that from October, all repo trading Kenya and Tanzania) to enhance cross- 6 scores countries based on the in the country will be governed by border activity. The EAC’s horizontal enforceability of close-out netting GMRA legal documentation. This has repos – repos between commercial locally, adoption of standard master been developed alongside market banks – have tended to use pledge- agreements and the strength of infrastructure allowing real-time insolvency frameworks. based collateral, with ownership of the trading and mark-to-market pricing collateral not formally changing. By The adoption of the Global Master for repo securities on the Bloomberg using repos, where collateral ownership Repurchase Agreement and legal platform. Adoption and enforceability of changes, countries can reduce the risk revisions to allow close-out netting the GMRA will standardise Ghana’s repo involved in money markets transactions, helped Ghana climb five places in Pillar market by creating legal certainty and especially cross-border deals, and 6. Fidelity Bank Ghana and Société reducing risk, and encourage greater thereby reduce their cost. Frontclear, Générale concluded the first Ghanaian participation in the repo market by local a firm that develops financial markets repo under GMRA in early 2020 with and global financial institutions. infrastructure, is in the final stages of a $40m trade, using Ghanaian cedi Few Ugandan banks have setting up a guarantee fund to facilitate government bond collateral. This performed transactions using GMRA Ugandan interbank trading by insulating followed the publishing of guidelines documentation, but wider adoption banks from credit risk exposure. Over for the repo market and use of GMRA is expected after the legal framework the last few years, Ghana has taken a similar route involving Frontclear. Mauritius and South Africa lead Pillar 6 Figure 6.2: More countries making close-out netting enforceable because of their adoption of the three global master agreements regarding Close out netting enforceability ISDA netting opinion derivatives, repos and securities Mauritius Yes Yes lending. The agreements are fully enforceable and widely used by banks South Africa Yes Yes and firms in both countries. Ghana Yes ISDA in pre-commissioning process Nigeria Yes ISDA in pre-commissioning process Close-out netting Zambia Yes ISDA in pre-commissioning process The enforceability of close-out netting is an important legal underpinning of Egypt Under consideration No derivative and repo markets. Scoring Morocco Under consideration No on this indicator for this year’s edition Seychelles Under consideration No is based on data and legal opinions from the International Securities Uganda Under consideration No and Derivatives Association, which Botswana No No led to significant changes in the Kenya No No scores of some countries, including Kenya, Tanzania, Namibia, Angola and Tanzania No No Botswana. Angola No No To make the GMRA legally enforceable Cameroon No No and consistent with its domestic laws, Eswatini No No Ghana had to pass legislation that Ethiopia No No allowed for close-out netting. In the event of a counterparty default, close- Ivory Coast No No out netting allows the solvent party to Lesotho No No settle their remaining transactions on Malawi No No a net basis, rather than having to make gross payments to the counterparty Mozambique No No and being grouped with other creditors Namibia No No while awaiting gross payments from the Rwanda No No counterparty. Close-out netting reduces systemic risk and Basel rules allow Senegal No No banks to apply lower risk weightings to Source: ISDA, OMFIF analysis assets with netting provisions on their

36 | Absa Africa Financial Markets Index 2020 balance sheets, freeing up capital for laws, the efficiency of bankruptcy and ‘Mauritius and other uses. reorganisation processes, the time and cost of resolution, and the recovery rate South Africa lead Nigeria enacted netting legislation for claimants. earlier this year, lifting it three places Pillar 6 because in Pillar 6 to third. Its companies and Zambia climbs three places in the pillar, of their adoption allied matters act includes provisions thanks to an increase in its insolvency for netting. FMDQ, a fixed income and score. The World Bank said it had made of the three global derivatives exchange in Nigeria, said: business rescues easier by introducing a master agreements ‘These game-changing provisions will reorganisation procedure and granting regarding cure critical legal deficiencies that debtors the possibility of obtaining hitherto affected financial market post-commencement finance, credit derivatives, repos development, with the netting or finance granted to a company in and securities provisions addressing the credit risk Zambia’s business rescue process. challenges, operational and legal According to one Zambian consultancy, lending.’ bottlenecks of gross settlement for a lack of post-commencement finance spot and derivatives transactions.’ can block an otherwise successful business rescue. The consultancy Namibia, Kenya, Egypt, Seychelles and added that there was a lack of finance Morocco are in the early stages of available because prospective investors drafting netting legislation. Enacting were unaware of the associated risks. netting laws is usually a prolonged Zambia now has the seventh highest process, as it may require changes to insolvency score. insolvency laws. Uganda is introducing legislation to allow close-out netting as Mauritius and Kenya earn points for part of its drive for greater use of repos improved resolving insolvency scores. under GMRA. The World Bank said both had made resolving insolvency easier by improving Nigeria and Ghana are two of five index the continuation of the debtor’s countries with full netting enforceability business during insolvency proceedings. aimed at the netting provisions of Mauritius and Kenya have the highest master agreements. The others are resolving insolvency scores in the index. South Africa, Mauritius and Zambia, which receive full scores for this indicator. Zambia has already made provisions Figure 6.3: Responsive insolvency regimes needed across the region Strength of insolvency framework score, max=100 for close-out netting and regulators are working with ISDA to mitigate Mauritius uncertainty in their netting Kenya Rwanda legislation, after which ISDA will begin South Africa commissioning a legal opinion. ISDA’s Morocco legal opinions satisfy the requirements Seychelles for financial institutions to obtain Ivory Coast regulatory capital relief for netting and Botswana Mozambique can be the green light for international Senegal investors waiting to enter a new market. Zambia Currently, the only index countries Egypt covered by ISDA’s legal opinions are Uganda Tanzania South Africa and Mauritius. ISDA is close Eswatini to commissioning legal opinions in Namibia Ghana and Nigeria. Lesotho Cameroon Insolvency Malawi Ethiopia Adequate insolvency procedures Nigeria improve investor confidence, helping Ghana Angola to attract foreign investment and 0 10 20 30 40 50 60 70 80 encourage business growth. Scores 2019 2020 from the World Bank’s ‘Doing Business’ Sources: World Bank, OMFIF analysis report consider the quality of insolvency

Absa Africa Financial Markets Index 2020 | 37 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 • Number of hedging products available • Level of withholding taxes on interest and dividends, including discounts for dividends from listed firms Size of market • Number of tax treaties • 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, Primary dealer system Moody’s, S&P) and coverage by local ratings agency • Existence of system • Size of repo market Pillar 4: Capacity of local investors Pillar 2: Access to foreign exchange Local investor asset concentration Net portfolio flows, ratio to reserves • Value of pension assets per capita • Total net portfolio flows, ratio to foreign exchange • Pension fund assets, ratio to total market capitalisation reserves of equities and bonds listed on exchanges

Foreign exchange liquidity • Interbank market foreign exchange turnover Pillar 5: Macroeconomic opportunity

Capital restrictions GDP growth • Foreign exchange capital controls • Composite five-year historical GDP growth average (2014-2019) and two-year forecast (2020-21) Official exchange rate reporting • Quality of data and frequency of publication Living standards • Existence of multiple or unified exchange rate • GDP per capita

Pillar 3: Market transparency, Competitiveness tax and regulatory environment • Absolute export market share and growth in export market share over past five years

Financial stability regulation Macroeconomic data standards • Basel accords implementation stage • Publication and frequency of GDP, inflation and interest rate data

38 | Absa Africa Financial Markets Index 2020 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 • 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 How to get full marks (i.e. GDP) this is 2019 data. For statistics covering the As the index is a comparison of a country’s financial previous 12 months (i.e. securities market turnover) this market against the selected sample, a country can is July 2019-July 2020. In cases where the data refer to reach the maximum score of 100. In such a scenario, the current conditions, such as for the Basel implementation country must achieve the maximum score of 100 in all stages, international accounting standards, and credit six pillars. ratings, the data are as of mid-August 2020. 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 2020, covering more than 30 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 2020 | 39 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 2020