The COVID-19 pandemic posed challenges on both the health and socio-economic fronts in Africa. Despite the various challenges - including slower global growth, higher inflation, and heightened global risk aversion - the response of many African countries has not been to shy away, but to further develop their financial markets, say Jeff Gable, head: macro and fixed income research, Absa Corporate and Investment Banking and Anthony Kirui, head: global markets, Absa Regional Operations.  

This progress is the key finding in the sixth edition of the Absa Africa Financial Markets Index (AFMI), which measures the financial market development across 26 countries in Africa. The index seeks to provide a measure of the openness, transparency and accessibility of Africa's financial markets. 

For Africa to sustain this positive trajectory, and ultimately create a more resilient continent for the future, continued progress on sustainability, digitalisation and financial inclusion will be crucial in improving Africa's appeal to investors. In turn, improved financing opportunities will provide the continent with the resources and resilience to best weather any future external shocks. 

Building market infrastructure during testing times 

Policy makers across Africa are recognising the importance of improving market conditions with cornerstone initiatives, such as Namibia's development of local pension fund markets which has helped encourage domestic long-term capital.  
However, as the continent enters a period of heightened financial market volatility, more can be done to ensure that Africa's financial markets provide the best environment for both the users and providers of capital.  

Part of the solution lies in fundamental market practices like transparency and timely macro and market data, but it's also imperative to focus on the detail such as increasing the availability of risk-mitigation financial products. By implementing policy geared towards strengthening market infrastructure, the continent can facilitate the efficient flow of capital and ultimately become more resilient to external market shocks.  

ESG: building on a green future 

A continent marked by the dominance of extractive industries and high exposure to climate change is beginning to turn its attention to ESG and sustainability.  

Globally, a significant amount of capital is being allocated to ESG and sustainable investments. It has been estimated that ESG assets may reach $53 trillion by 2025 which is a third of global assets under management (AUM).  

In order for Africa to be in a position to compete for these global savings, it's imperative that the continent's financial market regulation and product offerings align appropriately with this ESG focus. 

From a policy perspective, it's encouraging that this year's AFMI found that eleven countries in the Index have incentives for issuing ESG assets, sixteen countries with ESG-friendly market standards, and three further countries have joined South Africa in having climate stress testing as part of financial reporting when compared to last year's Index. With further initiatives already underway across the continent, it's clear that Africa is positioning itself for an ESG-centric investment world.   

The role of financial markets 

Financial markets are a powerful enabler for positive change. If Africa continues to build on the work that it has carried out around transparency, openness and accessibility, the continent will boost its capacity and resilience to shocks.  This is particularly important currently, given the darkening of the global economic environment.   

By Jeff Gable, head: macro and fixed income research, Absa Corporate and Investment Banking and Anthony Kirui, head: global markets, Absa Regional Operations.