Despite being weighed by declining foreign exchange reserves and weak capacity of local investors, Africa’s copper producer Zambia remains the eighth best ranked financial market. This was revealed by the Absa Financial Market Index (AFMIndex) 2019 has revealed. The Absa Index tracks 20 jurisdictions for market development on the continent across an array of six pillars namely market depth, access to foreign exchange, capacity of local investors, macroeconomic opportunity, market transparency, tax and regulatory environment and legality and enforceability of standard financial markets master agreements.
(*Maximum score on the index is 100)
Illiquidity in local and international debt. Unattractiveness of treasury assets continue to reflect fiscal posture as a consequence of rising debt that has weighed Zambia’s credit assessment to CCC (with negative outlook) by Standards and Poor’s and Caa2 by Moody’s has continued to adversely impact liquidity of government securities. Credit default spreads on Zambia’s dollar bonds were elevated above 2,500 basis points as sentiment remains feeble narrowing chances for the copper producer to refinance its soon maturing debt.
Decline in reserves and weak macroeconomic opportunity. Zambia’s 2019 score climbed 2 points to 55 from 53 (2018) supported by an improving regulatory and legal framework but weak capacity of local investors. The Absa index reveals that Zambia slid to 61 from 78 (2018) on access to foreign exchange on the back of increased vulnerabilities to external shocks exacerbated by a decline if foreign exchange reserves. Zambia has for the last 2 years scored highest on this pillar being one of the most free exchange float regime second to South Africa. Structural issues manifesting in financial markets have weighed significantly necessitating the decline. The report cited Zambia and Angola as key drivers of the slow growth pace in forex reserves that modestly grew to $244billion from $233billion.
Weak capacity of local investors. The copper producers capacity of local investor ranking remains very weak at 13 ranking it 17th of the 20 countries tracked while macroeconomic opportunity pillar scored Zambia 51 ranking it 19th on the index. The two pillars capture the overdependence on one pension funds for fixed income trading and severe lack of opportunities evidenced by a shallow capital market in a high cost of funding environment.
Primary dealership for Zambian markets. Initiatives by the Bank of Zambia (BOZ) to introduce primary dealership have left market players wondering how this will work when pension funds like the state owned NAPSA are not buying bonds as much. It then questions what exit strategy will be for commercial banks that lengthen duration with trading intent.
Illiquidity in Zambian capital markets. Stock markets remain illiquid and inactive with few to zero public offerings. Equity listings remain 23 on the Lusaka Securities Exchange (LuSE) reflecting lack of market making experience and weak innovative capital raising capacity by the local bourse and the securities regulator in Africa’s copper producer. Pension Insurance Authority (PIA) and the Security Exchange Commission (SEC) have struggled to regulate the insurance and asset management space to build the level of confidence required to support market development. The red metal hotspot had only one Initial Purchase Offer (IPO) in December 2019 which closed in January 2020. The capital markets have for a long time struggled to grow. Insurance and Asset management entities still grapple with playing the role they are expected to play in the financial markets.
Africa’s persistently limited array of assets. The index revealed that Africa still grapples with a limited array of financial assets which are restricted to government securities with very little scope for innovation for pension fund assets. This continues to impact the depth of financial markets weighing liquidity. The index also highlights that financial markets perform best in market transparent tax regimes and regulatory environments. Some solid performances were spotted in Tanzania, Rwanda and Mauritius that continue to show upward trajectories in market development. Africa’s markets continue to reflect the fiscal posture, economic growth velocity, commodity price vulnerabilities and quality of central bank management
The Kwacha Arbitrageur
