The trading floor of the Johannesburg Stock Exchange. African capital markets are facing growth obstacles, among them low liquidity and new listings drought. PHOTO FILE | AFP
Capital markets remain fragmented and shallow, compared with their Latin American and Asian peers.
The average market capitalisation is just 56 per cent of GDP.
Only South Africa, Botswana and Ghana have a market capitalisation greater than 100 per cent of GDP while 14 have a lower than 50 per cent capitalisation.
Africa’s capital markets are facing growth obstacles, among them low liquidity, new listings drought and lack of product diversity, a new report shows.
The second edition of the Africa Financial Markets Index (AFMI) shows that despite African countries implementing policies to bolster regional stockmarket integration and encourage expansion, the capital markets remain fragmented and shallow, compared with their Latin American and Asian peers.
The index by Absa Group, the parent company of Barclays Bank, which surveys 20 stockmarkets in Africa, shows low overall liquidity, with 15 countries having equity market turnover of less than 10 per cent of market capitalisation and 10 having bond turnover of less than 10 per cent of outstanding bonds.
The average market capitalisation is just 56 per cent of GDP. Only three countries — South Africa, Botswana and Ghana — have a market capitalisation greater than 100 per cent of GDP while 14 have a lower than 50 per cent capitalisation.
More critically, local investor capacity in many African countries is low, with pension funds, insurance firms and other institutional investors lacking sizeable assets under management, forcing financial markets to rely on foreign investors.
Barriers
Product offerings remain shallow while entry barriers have made it impossible for small firms to list, a problem exacerbated by stringent, inflexible and outdated regulations.
“Many national exchanges in Africa are small, illiquid and inefficient and local investor capacity is often limited. Therefore, fostering closer integration between national exchanges, or creating and strengthening regional ones, is an important area of focus,” states the report.
The report assesses progress and potential of capital markets across six key areas: Market depth; access to foreign exchange; market transparency; tax and regulatory environment, macroeconomic opportunity, and the legality and enforceability of standard financial markets master agreements.
For the second year running, South Africa, with a score of 93 per cent, was declared the most advanced financial market in Africa followed by Botswana, which tied with Kenya with a score of 65 per cent.
A strong financial market infrastructure and a robust legal framework made South Africa the leader of the pack despite a worsening macroeconomic performance that has pushed the country into recession.
In East Africa, Uganda ranks as the second-most progressive financial market, with a score of 50 per cent and position 10 overall due to its stable performance, with good foreign-exchange access, but low local investor capacity.
However, the country’s above-average withholding tax rate and other policies discourage market growth and development.
Rwanda comes third with a score of 49 per cent, dropping three positions on the continent to position 11, attributed to discrepancies between strong official rules on transparency and the reality of implementation.
