For the seventh year running the Absa Africa Financial Markets index continues to track performance of financial markets on the continent across 6 key pillars namely market depth, access to foreign exchange, market transparency, capacity of local investors, the macroeconomic environment and legal standards – enforceability. It is about a dry point of construction that the chaotic state of the global environment has roiled markets on the back of heightened geopolitics that have impacted grain, foreign exchange and energy markets whose volatility continues to transmit input, energy and food inflation to nations. This has kept most global central banks outside their inflation targets which marked the genesis of the monetary tightening era over the last 12 months.
Africa’s second largest copper hotspot Zambia, has been on a tumultuous path post COVID19 which exacerbated its already existing frail fiscal posture but for landmark debt restructure with bilateral creditors that will see $6.3 billion of its external obligation stock reorganized to 2043. This has given some fiscal reprieve to the markets with a surge of confidence driving markets. The AFMindex 2023 reveals a ranking of 12 place for the Southern African nation of the 28 financial markets tracked with a score of 55 out of a 100 overall, unchanged from previous years. Pre – pandemic, Zambia was ranked 8th of the 20 countries tracked whose position has deteriorated over the years given a fast evolving threat landscape due to widening political risks influencing ballooning of its debt position.
GOVIE SETTLEMENT EFFICIENCY ON STP
The copper producer was cited for successfully implementing straight through processing (STP) for government securities thereby enhancing settlement efficiency. Zambia’s markets continue to thrive on high on the legal standards and enforceability at 85 out of 100 – in fourth place – reflecting a robust legal framework. Ahead of it are Mauritius (100), South Africa (100), Nigeria (90), Ghana, Malawi and Uganda all at 85. These nations have successfully implemented the use of legal opinions to support documentation explaining the gap.
STABLER INFLATION SUPPORTED MACRO PILLAR
The report further reveals Zambia’s score as 74 on macroeconomic environment pillar as a result of a stable inflation environment amidst rising price pressures globally on account of widening external shocks. Zambia’s consumer price index despite being on the outliers of the Bank of Zambia target band of 6-8% was fairly low and stable for a year and only started to rise more recently. Transparency on policy especially fiscal developments gave the Southern African nation a positive cue in view of the government’s efforts to restore fiscal fitness with strong political will reported after 2021’s election outcome. Zambia attained a landmark debt treatment in principle on the side lines of the Emmanuel Macrons global conference on climate finance in June 2023 which has had significant implications on confidence and is expected to free space that is said to increase economic production possibilities. The Zambian government is in the labyrinth of a debt restructure with ongoing negotiations with private creditors who await the signing of memoranda of understanding expected in the next few weeks as hinted by some IMF officials on the sidelines of the IMF meetings in Marrakech. Ahead of Zambia were Botswana (87), Uganda (86), Tanzania (81), Nigeria (79), South Africa (78), Seychelles (77), Egypt (76), Namibia (76), Egypt (76), Namibia (76), Kenya (76), Eswatini (76), DRC (76) and Mauritius (76).
WEAK CAPACITY OF LOCAL INVESTORS PERSIST
Zambia still grapples with capacity of local investors with a score of 11 out of a 100. The copper producer still has immense dependencies on the state pension fund as a key capital and bond market player. Despite a plethora of insurance and local authority superannuation funds, these players remain inactive in the capital markets due to liquidity constraints. Illiquidity of the capital markets has generally been a key driver of this pillar. Namibia’s score was a 100 setting the standard for the continent. Zambia was fairly positioned on the market transparency pillar rated 74 out of a 100 which the copper producer has been fairly resilient on given some of the key developments in its market such as adoption of green listing rules as most African nations start to factor sustainability in their financial markets. Zambia now has a ministry of green economy that has effectively collaborated with the Securities and Exchange Commission working in conjunction with the Ministry of Finance. This partnership also helped develop the capital markets master plan. These developments position Zambia for green bond and asset issuances as the country drives a sustainability agenda. Leading this pillar was South Africa with a score of 98 out of a 100 with record issuances of innovative products to include green and sustainability linked bonds.
FX LIQUIDITY WEIGHED ACCESS TO CURRENCY
Zambia’s access to foreign exchange market score of 57 does reflect the liquidity bottlenecks that the Southern African nation faced in the wake of decline in flows as mining production declined significantly on operational hurdles that impacted the supply side of the market. Zambia faced increased asset sell off pressure with protracted debt restructure causing market weariness at a time when global uncertainty was elevated giving rise to a stronger dollar. The 57 score is a marginal improvement from previous years rating of 56 and a deterioration from 2018 highs of 77 pre – pandemic. Zambia’s foreign exchange market continues to be shaped by mining flows driving the supply side and net import posture impacting agribusiness, energy and the debt service demand side. Leading the access to foreign exchange pillar was South Africa with a score of 88. Generally African currencies suffered depreciation pressure in the period.
ZAMBIAN MARKETS HAVE SCOPE TO DEEPEN
Aligned to the access to foreign exchange is market depth for which Zambia scored 30 out a 100. The copper producers array of financial instruments remains limited with minimal innovations seen in the recent years. Zambia is poised to see some new issuances following a sustainability agenda as Zambian capital markets recalibrate towards a more climate risk sensitive agenda. There has been increased interest in green bonds after the COP26 United Nations climate change conference for which Zambian financial institutions has been in attendance. No instrument been issued yet.
Generally the AFMindex reveals a boost in the growth of financial markets due to key policy changes. With easing global pressures, growth is poised to regain momentum driven by business activity that then fuels usage of financial instruments. The ESG agenda is forecast to be the next key driver of financial innovation.
The Kwacha Arbitrageur
