Uganda maintained its top five position in an annual index that evaluates the development of financial markets in African countries, ranking behind investment hubs South Africa and Mauritius, and economic powerhouse Nigeria.
The Absa Africa Financial Markets Index, now in its seventh year, assesses the openness and attractiveness of financial markets in African countries. It tracks countries efforts to improve capital markets through their performance on six benchmarks – market depth, access to foreign exchange, market transparency and regulatory standards, domestic investor capacity, macroeconomic climate and transparency, and legal standards and enforceability.
The majority of countries in the index – 15 out of 28 – improved their scores compared to the previous year, mainly due to better performance in market transparency resulting from an increase in the number of credit ratings. An improvement in macroeconomic conditions, as countries recover from the Covid-19 pandemic and adjust to the Russia-Ukraine war, also led to better scores.
Progress was also made through improved incentives and standards for sustainability and diversification. Zimbabwe, for instance, added climate risk management guidelines to its financial stability regulations, while Rwanda is working with multilateral partners to strengthen environmental, social and governance standards for green investments. The South African and Tanzanian stock exchanges, on the other hand, approved their first Sharia-compliant instruments.
The report, released last week, underlines the impact of high interest rates in advanced economies, particularly in the United States, and lower risk appetite in global markets on African countries in the year to July. This led to a weakening of currencies against the dollar – raising the cost of imports – and capital outflows. As a result, foreign exchange reserves dropped in 17 countries, and most of them experienced declines in liquidity and the size of financial markets and local investor assets in dollar terms. Uganda, for example, registered a decline in foreign currency reserves and market liquidity.
Three of the top five countries – South Africa, Nigeria, and Uganda – saw their overall scores fall, although they maintained their positions from last year. South Africa has topped the index in each of the last seven years. Mauritius and Namibia, ranked second and fifth this year, have been in the top five since the index’s inception. Nigeria was third, followed by Uganda in fourth place for the second year running.
The report notes that progress in building financial markets on the continent has been slow over the last seven years, as shown by the “wide gap” between the leading countries and the rest. Only the top five countries scored above 60 this year, down from nine last year. Meanwhile, South Africa and Mauritius are miles ahead, with 10 points separating second and third, and are the only two countries to score above 70 since 2019.
“This suggests that there is plenty of scope for further improvement across the continent,” the report said.
It identified three areas impending the development of Africa’s capital markets. “Liquidity is limited in domestic equity, fixed income and foreign exchange markets in most cases. Tax environments are becoming less conducive to investment in some jurisdictions. And legislation to promote the use of standard master agreements remains sparse,” it said.
The highlight of Uganda’s financial markets in the year ending June, according to the report, was the inclusion of Uganda’s local government bonds in the FTSE Frontier Emerging Markets Government Bond Index in April. The index series, which is managed by FTSE Russell, a subsidiary of the London Stock Exchange Group, tracks the performance of local market, fixed-rate local currency government bonds issued by frontier emerging market countries. Its aim is to highlight “sufficiently investable” government bonds from non-mainstream emerging markets.
Compared with last year, according to the Absa Africa financial markets index, Uganda improved its ranking in market depth by one place, but dropped four places in access to foreign exchange, and three places in market transparency, tax and regulatory environment. The country maintained its position in the local investor capacity sub-indicator, moved up one place in macroeconomic environment and transparency, and dropped one place in legal standards and enforceability.
Uganda scored best on macroeconomic environment and transparency, which looks at macroeconomic stability and data and policy transparency, ranking second after Botswana. It also scored well on legal standards and enforceability, which measures a country’s legal and contractual standards against global standards, and relatively well on market transparency and regulation and access to foreign exchange.
It, however, does not perform as well in terms of local investor capacity, ranking 17th, the same position it held last year. The variable focuses on local investor capacity by assessing the development of local pension funds; it looks at the size of pension fund assets in per capita terms, and relative to local listed securities.
“Pension funds have the potential to drive capital market development owing to their extended investment horizons and ability to diversify across a wide range of asset classes, such as listed equities, corporate bonds, and private markets,” the report said.
Uganda’s poor score on this pillar is due to the fact that it is dominated by countries from Southern Africa, which benefit from their more advanced neighbour. According to the report, “Southern African countries have the most established pension systems, having benefited from early establishment and close links to South Africa – the largest financial market in Africa.”
The report is produced by the Official Monetary and Financial Institutions Forum, a UK central banking think-tank, and financed by the Johannesburg-listed Absa Group. It is based on a mix of quantitative data and survey responses from central bankers, stock exchanges, regulators, international organisations, banking associations, and accounting firms.
Two countries – Cabo Verde and Tunisia – were added to the index this year, following last year’s additions of the Democratic Republic of Congo, Madagascar, and Zimbabwe. “The index now encompasses approximately 80 per cent of the population and gross domestic product of Africa,” according to the report.
