South Africa still the leader in financial markets development

George Asante, The head of global markets for Absa regional operations

The country was also ranked top in access to foreign exchange; market transparency, tax and regulatory environment; and capacity of local investors. It however came second to Egypt on macro-economic opportunity and third on legality and enforceability of standard financial markets master agreements after Mauritius and Kenya, respectively.

The index, now in its third year, assesses progress and potential across six key pillars and was produced by the Official Monetary and Financial Institutions Forum (OMFIF), an independent research think tank for central banking, economic policy and public investment.

The countries were ranked based on the following pillars:

Pillar 1

Market depth: Examines size, liquidity and diversity of products in markets, as well as countries’ efforts to merge exchanges and launch new markets.

Pillar 2

Access to foreign exchange: Looks at factors that impact markets’ accessibility to international investors, including the severity of capital controls, exchange rate reporting standards and levels of foreign exchange liquidity.

Pillar 3

Market transparency, tax and regulatory environment: Assesses countries’ regulatory and tax environments for financial markets, as well as transparency and enforcement of accounting rules.

Pillar 4

Capacity of local investors: Examines the size of local investors, assessing the level of local demand against supply of assets available in each market.Pillar 5Macro-economic opportunity: Evaluates economic performance, financial risks and financial transparency, demonstrated by availability of data, open monetary policy communication and the timely release of state budgets.

Pillar 6

Legality and enforceability of standard financial markets master agreements: Measures how well countries have adopted internationally accepted legal standards, the enforcement of netting and collateral positions, and insolvency regime adequacy.

Other countries catching up

George Asante, The head of global markets for Absa regional operations, says South Africa’s top ranking across four pillars is not surprising given the development and sophistication of its financial markets. However, other countries ranked in the index are fast catching up due to ongoing regulatory and policy reforms in those markets, which Asante partly attributes to the impact the index is having.

“South Africa tops the index largely due to its sizeable lead in market depth. While it is likely to remain an outlier in this pillar, the creation of new bourses and key mergers between existing ones will improve the standing of other countries in coming years,” he says.

South Africa’s high position on access to foreign exchange after having been overtaken by Kenya in the previous edition of this index was as a result of high interbank foreign exchange turnover, regular exchange rate reporting and a favourable reserve level relative to net portfolio flows.

In the market transparency, tax and regulatory environment pillar, South Africa’s scored highest on its tax environment for financial markets which plays a crucial role in offering investors incentives to invest in financial products. “They provide transparency, which is vital for fostering investor confidence,” Asante says.

South Africa beat other countries on the fourth pillar of capacity of local investors because of its deep and liquid capital markets which offer local pension funds many investment options. “Its pension funds are also large relative to the capitalisation of assets listed on the Johannesburg stock market, which means they contribute to its liquidity and development, as well as benefitting from it,” he says.

Progress

Commenting on the overall findings, Asante says the impact of the index is demonstrated by the progress financial regulatory authorities are making to further reform their financial markets across African markets.

“There has been a concerted effort among African policy-makers to react to the findings. This can be seen in the vast improvements in Pillar 6, ‘legality and enforceability of standard financial markets master agreements’, where countries have responded to past findings in order to align with best practice. The index is therefore becoming a powerful barometer for policy-makers and playing a role in building an Africa which is able to fund itself,” he says.