Since the onset of Covid-19, financial markets around the world have been plagued by challenges and African markets have not been immune to these headwinds, says Jeff Gable, Head of Macro and Fixed Income Research at Absa Group.

We've seen rising interest rates, growth hampered by slow vaccination roll-out campaigns and volatile commodity prices. Russia's recent invasion of Ukraine only intensify these pressures. 

In the midst of this, we saw some evidence of deterioration in certain elements of financial market development across the continent.  In the context of the 2021 edition of the Absa-OMFIF Africa Financial Markets Index, a majority of the 23 countries surveyed experienced an overall decline across scoring.  In general, the parts of the index most impacted by recent conditions were those index pillars that look to measure market depth and transparency, and the capacity of local investors.

Facing the twin challenges of reinvigorating markets and strengthening market infrastructure, Africa is now navigating an extremely tricky economic atmosphere.

The continent at large has not had to weather a full-scale financial crisis - however, individual countries have required debt restructuring and the overall debt environment, as measured by the IMF's debt sustainability framework, highlight rising risks ahead. With a focus on financial market development, many nations are using lemons to make lemonade - absorbing the warning signs thrown up by the shock of a global pandemic and refocussing their attention on adapting market standards to meet the needs of international investors seeking to diversify risks. 

To give themselves the best chance for success, African markets must lean into green finance and digital transformation - two trends that are crucial to securing their futures in the global economy.

ESG: the door to global money pots

ESG assets are the door Africa needs to open to access global money pots. Investors around the world are increasingly pouring their money into certified ESG assets, as such, a collective ESG-focused pivot is necessary.

Fighting Covid-19 has been a priority, however several African nations have recognised the opportunities inherent in ESG-focused development. They have demonstrated a commitment to leading the charge over the past year, and have acknowledged the importance of alleviating climate-related risks to the financial system.

At the time that the index scoring was compiled, 13 out of the 23 of the indexed countries had some level of ESG regulatory framework in place, with several introducing sustainable finance products.  Constructively, further strides have been made by many index countries in the months since that scoring was done.  

Digitising Africa: an avenue to many improvements

Another important avenue to future-proof Africa's financial markets is digital technology and innovation. For instance, in order to attract investors and issuers, and make capital markets more efficient and competitive, African nations have been upgrading market infrastructure and regulatory support for the development of technology-based tools. 

The Johannesburg Stock Exchange is developing a digital private placements platform to raise capital for infrastructure finance and small- and medium-sized enterprises. Another example of this is eSub, developed by the Central Bank of Rwanda. The platform enables people to buy and sell government securities using their mobile devices.

While a crisis may distract investment away from such initiatives, new technologies like digital currencies and blockchain solutions bring with them the potential to vastly improve market efficiencies - so it's crucial to keep investing during crises. 

Digital transformation can also lead to more growth and higher living standards in the long run. Digital transformation can put domestic assets to work by making it simpler for retail investors to participate in local equity and bond markets. In addition, it can make the continent more competitive as it becomes easier for governments to finance themselves. 

A future-proof Africa 

Against the backdrop of pandemic recovery and the turbulence triggered by the Russia-Ukraine war, Africa's ability to continue to pursue innovation provides a positive outlook for the future.  

Policymakers, investors and asset managers must not take their eye off the ball now. They will need to continue monitoring the openness and attractiveness of the African capital markets in which they participate.

As governments continue to face fiscal difficulties, debt pressures and an employment crisis, not to mention devastating climate-related weather events, we remember that African nations have always persisted in pushing forward against strong headwinds. 

Fostering budding initiatives in green finance and digitisation will be vital to increasing Africa's resilience to shocks and improve the region's chances of enjoying a sustainable post-pandemic recovery. If adopted more broadly, they hold the potential to deepen domestic markets and to contribute towards healthy financial market development.

By Jeff Gable, Head of Macro and Fixed Income Research at Absa Group