{"id":243164,"date":"2016-08-25T11:06:19","date_gmt":"2016-08-25T11:06:19","guid":{"rendered":"http:\/\/citifmonline.com\/?p=243164"},"modified":"2016-08-25T11:06:19","modified_gmt":"2016-08-25T11:06:19","slug":"barclays-md-development-of-africas-financial-markets-is-a-social-imperative-article","status":"publish","type":"post","link":"https:\/\/citifmonline.com\/2016\/08\/barclays-md-development-of-africas-financial-markets-is-a-social-imperative-article\/","title":{"rendered":"Barclays MD: Development of Africa\u2019s financial markets is a social imperative [Article]"},"content":{"rendered":"
The underdevelopment of Africa’s financial markets has been on my mind since I started my first job as a junior trader at a local Ghanaian bank in the early 2000s.<\/p>\n
My initial quest for a developed African market was about the opportunity to trade in the complex financial instruments I studied at the University\u00a0of\u00a0Ghana Business School. Products such as options, repurchase agreements, futures, commodities\u00a0etc.\u00a0all sounded exciting to me. But, working across the continent in recent years has been revealing.<\/p>\n
Through my interactions with government officials, central banks, regulators, multilateral agencies, investors (both local and foreign), corporates and stock exchange operatives, I discovered more profound reasons\u00a0for\u00a0developing\u00a0Africa\u2019s\u00a0financial markets.<\/p>\n
I now believe the development of Africa\u2019s markets\u00a0is a social imperative\u00a0that\u00a0should be placed on the national development agendas of all African nations, in order\u00a0to accelerate the mobilisation of internal\u00a0funding sources.<\/p>\n
Market development has become more important given the current wave of regulations and the economic downturn in advanced markets, which have a\u00a0negative impact on countries with significant reliance on external capital.<\/p>\n
In addition, the recent Brexit vote means increased uncertainty, and with most of Africa being a frontier market, less global capital will be allocated during this\u00a0turbulent time.<\/p>\n
The\u00a0African Development Bank\u00a0(AfDB) stated last year that Africa requires additional financing of $50\u00a0billion per year to bridge its infrastructure gap.<\/p>\n
Infrastructure (both social and economic)\u00a0is critical in linking individuals and economic agents to opportunities, and it acts as a catalyst to improve economy-wide productivity, efficiency and inclusive growth.<\/p>\n
Until now, the continent has relied on traditional external funding and,\u00a0to a limited extent,\u00a0internal sources for infrastructure development.<\/p>\n
This is because, with the exception of South Africa, most African markets have\u00a0shallow financial markets, which contribute only a small portion of its funding needs.<\/p>\n
With the right framework in place, the continent could rely on local market resources from investors to fund a significant portion of the $50 billion infrastructure funding gap.<\/p>\n
While\u00a0financial leaders\u00a0on the continent have a strong desire to harness this potential, very little has been realised so far.<\/p>\n
In order to avoid further repercussions, a joint approach to develop Africa\u2019s markets by the following three sectors is critical.<\/p>\n
Governments must prioritise market development at a national level<\/strong><\/p>\n Some\u00a0significant changes required to set the stage for market development can only be made with the involvement of government.<\/p>\n Critical support (especially by the Ministry of Finance and the legislature\u00a0surrounding passing relevant laws) is needed.<\/p>\n As are\u00a0transparency of policies and market-friendly fiscal policy prescriptions.<\/p>\n This must be supported by the right monetary policy that benefits the overall market in all its segments, and the national development agenda must express a willingness to rally effort within defined timelines.<\/p>\n Sustained macroeconomic stability is essential for orderly growth.<\/p>\n Bad fiscal\u00a0discipline,\u00a0is not conducive to the development of the market because it breeds excessive rollover risks, increases transaction costs and crowds out the private sector.<\/p>\n Consideration should also be given to rolling out Continuous Link Settlement (CLS) bank facilities in the market to eliminate settlement risk.<\/p>\n The\u00a0CLS banking facility (available in most developed\u00a0markets including South Africa)\u00a0ensures that foreign exchange transactions are settled only when both parties to a trade have\u00a0cash ready for settlement. This eliminates\u00a0the risk of defaulting on payment dates.<\/p>\n If the right collateral framework (known as Credit Support Annex or CSA) and a CLS facility are in place, the risk of trading could be reduced to zero and this means that counterparts could transact without having to worry about the potential for others to default.<\/p>\n Government (the biggest issuer of debt in the local market)\u00a0should\u00a0also\u00a0adopt innovative ways to deepen the market, including rolling out a full primary dealership system to promote bond trading; an overhaul and liberalisation of the pension fund management sector; implementing price risk management policies to achieve stability-demystifying derivatives; and encouraging parastatals to utilise capital markets to raise funding.<\/p>\n Financial institutions must lead by example<\/strong><\/p>\n Without financial institutions (including banks, asset managers and pension funds)\u00a0the drive to develop\u00a0Africa\u2019s\u00a0markets will not be achieved.<\/p>\n Being primary users of financial products financial institutions\u00a0must\u00a0spearhead discussions and initiatives to promote the development of the market.\u00a0They\u00a0must also ensure\u00a0that relevant\u00a0conversations\u00a0with relevant decision-makers occur (e.g.\u00a0getting the right legal framework in place to\u00a0ensure\u00a0that\u00a0they continue engaging stakeholders).<\/p>\n In 2014, the Financial Sector Deepening Committee in Tanzania was instrumental in revising the interbank foreign exchange rules that had the potential to disrupt trading in the foreign exchange market in Tanzania. The ACI Financial Markets Association (ACI) in Ghana has also been active in driving significant changes in settlement infrastructure and secondary trading rules.<\/p>\n All bankers\u2019 associations and where applicable, Securities Industry Associations in Africa, must ensure the establishment of working groups for the deepening of markets.\u00a0Simultaneously, local branches of the ACI should be incorporated into these working groups. This would\u00a0ensure that issues outside day-to-day market challenges are raised. Senior management\u00a0at\u00a0banks must also\u00a0commit\u00a0to the objectives of market associations.<\/p>\n