Africa’s Sequenced Securities Screens

Despite a near 5% loss on the Morgan Stanley Capital International Frontier Africa Index through the third quarter, with Kenya (+15%) and Nigeria (-22%) at opposite ends, and the International Monetary Fund evoking sovereign debt unsustainability in its annual meetings financial stability publication, a separate measure of stock market progress in twenty countries averages above 50 for positive direction for the first time. The third year of the tally, compiled by pan-African banking giant Absa in collaboration with the London-based Official Monetary and Financial Institutions Forum (OMFIF), covers a half dozen categories including securities market depth and diversity, macroeconomic trends and foreign exchange access, and  legal/regulatory and institutional investor status. The Africa Financial Markets Index (AFMI) draws from desk analysis and interviews with executives and officials across and outside the continent. In Washington World Bank International Finance Corporation experts were consulted, and aggregate scores ranged from 88 for sophisticated South Africa where Absa is headquartered, to 27 for startup Ethiopia which plans stock exchange launch next year.

The IMF’s Global Financial Stability report landed with a thud at the annual gathering, as it termed one-third of emerging market debt “overvalued” in contrast with more fairly priced equities. External high-yield sovereigns were frothiest, while state-owned companies that are half that asset class are a “growing concern,” it noted. Half of countries with “B” or lower ratings, mainly low-income economies in Africa and elsewhere with bonds outstanding tripling to $200 billion the past five years, are at risk of sudden spread widening or access cutoff. Commercial debt equals 7% of gross domestic product and half of foreign reserves, with heavy medium-term servicing loads.  Chinese creditors not following standard restructuring rules hold a large portion, and commodity linkage can result in physical asset seizure in default. Record-keeping and reporting and an overall strategy are often absent, as the Fund has started to work with private industry bodies like the Institute for International Finance to promote better frontier market hard currency borrowing transparency and capacity.

The latest AFMI update underscores South Africa’s dominance in market liquidity and size, with the Johannesburg exchange capitalization triple GDP, but a half dozen neighbors including Ghana, Kenya and Nigeria are above 50 with new bond listings. However local yield curves and secondary trading have been slow to develop, with easy Eurobond resort and separate systems like the UEMOA Francophone West Africa zone’s auction platform. Primary dealers exist in most places but are inactive, and Kenya has an interest rate cap and Ghana may introduce an international ownership one for domestic debt. Small firm offerings are rare and further stunted by meager venture capital and private equity scope. Exchange consolidation has also been gradual, with Cameroon just recently merging with the regional Central Africa bourse and Anglophone West African countries still exploring joint frameworks.

Combined foreign exchange reserves were flat at around $250 billion, with Angola and Zambia running low. South Africa’s interbank currency turnover was $1.7 trillion in 2018, dwarfing second-tier Egypt and Mauritius in the $10 billion range. Pegged regimes remain in Cote d’Ivoire and Botswana, and managed floats in Angola, Egypt, Morocco and Rwanda feature regular central bank intervention. The best performing area was regulation and tax with a median 67 result for the majority due to clear tax codes and bilateral treaties, and equal treatment of capital gains and interest income. In 17 of the 20 economies international financial reporting standards apply, although the accountant and auditor pool is limited. Inaugural corporate credit ratings were assigned to issuers in Cameroon, Senegal and Uganda, and most countries use modern Basel III prudential norms for core banks. The institutional investor foundation is narrow, with half the list at less than $100 per capita in pension fund assets. Mauritius and the Seychelles are among the exceptions with thousands of dollars for each citizen, but government bonds are typically the chief compulsory allocation across the universe with Namibia an outlier on half the portfolio in equities. Funds are also confined to the domestic market, but infrastructure needs and technology are expanding the pension sector. Nigeria recently enacted reforms for managers to invest directly in power and transport projects, and mobile money inclusion strategies now target poor and rural populations with retirement schemes even as underlying financial markets are in their infancy, according to the survey.  

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