Deepening Africa’s Financial Markets

Africa | Emerging Markets Regional Review

African economies are well on their way to transforming the region’s status from a frontier to an emerging market.

The International Monetary Fund predicts that the African economy will grow by 5.8% in 2015, up from 5.1% this year. The forecast growth for next year is the second-highest among regional economies after Asia, according to the IMF. The average regional growth figure masks even more robust performance projected for some low-income economies, where growth is expected to be as high as 6.8%, and an average growth of more than 8%, forecast for Chad, Côte d’Ivoire, Democratic Republic of the Congo and Mozambique. Nigeria, the region’s biggest economy, is projected to grow by 7.25% in 2015.

The projections are based on the assumption that conditions that have permitted the sterling performance across the continent will continue or even improve. “We have witnessed a virtuous cycle of both economic and political stability, favorable commodity demand, rising foreign reserves, expanding middle-class purchasing power, and the rise and rise of consumer markets all across the African continent,” says Dr. Bongo Adi, a senior lecturer at the Lagos Business School, Pan-Atlantic University, Nigeria.

Record-low interest rates in developed markets and liquidity saturation have, ironically, created a very favorable investment climate—driving massive private capital inflows to many African countries, Adi says. Inflows—both direct and portfolio investments—increased from $13.2 billion in 2003 to $48.3 billion in 2012, he says. And until the African markets complete their current growth trajectory, Adi expects higher returns on investment to continue to drive more capital to the region. 


The IMF report notes that Africa’s growth will be driven by “sustained infrastructure investment, buoyant services sectors, and strong agricultural production, even as oil-related activities provide less support.” 

Africa’s need for infrastructure development is evident in all sectors of the economy. From roads to railways to facilities in the power and oil and gas sectors, the continent needs significant amounts to be invested annually. In some countries, growth is tied strongly to the provision of such infrastructure facilities to support economic activities.

Infrastructure financing therefore represents one of the biggest opportunities in Africa, through both direct and portfolio investments. It presents opportunities for funds to flow into the continent’s financial markets, as investors respond to the high rates of return currently available in the region.

Sources of funds for infrastructure financing in Africa will include private equity capital and portfolio investments through the stock markets, as some of the listed companies or new ones will be raising funds to finance infrastructure projects.

The African market, typical of frontier markets, is currently offering higher returns—and is also riskier—than emerging markets, says Pabina Yinkere, an analyst and head of research at Vetiva Capital Management, a Nigeria-based brokerage. The markets “are characterized by low market capitalization and liquidity, and offer the opportunity for diversification of funds as correlation between frontier markets and other regions is low,” adds Yinkere.


Yinkere, Vetiva: The markets offer the opportunity for diversification of funds as correlation between frontier markets and other regions is low.

The coming year will also witness significant advances in major subregional market integration on the continent. In West Africa, for instance, stock exchanges will harmonize listing and trading regulations among the region’s bourses, adopt common clearing systems and allow free movement of capital market operators among the countries.

Africa’s transition to an emerging market will be “gradual and not overnight, but one of the quick things that that will happen is the integration of West African exchanges,” says Yinkere. Enabling seamless transactions among exchanges in the region “will expose the attractiveness of the bloc as a whole.” It will give investors access simultaneously to markets in Ghana, Nigeria and Sierra Leone and to the regional stock exchange, Bourse Régionale des Valeurs Mobilières, or BVRM, located in Abidjan, in Côte d’Ivoire, which serves the eight French-speaking countries in West Africa. 

One of the characteristics of African stock markets is their low capitalizations and liquidity, says Yinkere, but he notes that the integration will help improve liquidity. When integration is fully achieved in 2015, the region will have a West African Securities Market, with stockbrokers and other operators issued with a common passport to allow them to move freely in the area.


And in the eastern and southern Africa region, the planned COMESA-EAC-SADC Tripartite Free Trade Area, which will comprise the Common Market for Eastern and Southern Africa, the East African Community and the Southern Africa Development Community—26 nations, all told—is scheduled to launch this month. The TFTA, which includes half the countries in Africa, has a GDP of about $1 trillion. It has been in the works for over six years. Its launch “will no doubt bring tremendous benefits for the 600 million people in the tripartite region, through the removal of inconsistencies and costs in regional integration brought about by overlapping memberships especially in the area of trade policy and trade facilitation,” according to a statement issued by Comesa, which currently holds the chairmanship of the tripartite negotiations.

Africa’s rating as a business destination rose further following the release of new economic data this year. Nigeria and Kenya in 2014 recalibrated their economic data, “thus demystifying old typologies and uncovering large-scale diversification of the economy, contrary to widely held beliefs,” says Adi. The exercise in both countries led to increases in the sizes of their economies as measured by the gross domestic product. Consequently, he adds, “we have been forced to take a different look at African economies through new and optimistic lenses as no longer the ‘hopeless’ continent.”   

We have witnessed a virtuous cycle
of both economic and political stability, favorable commodity demand, rising foreign reserves, expanding middle- class purchasing power, and the rise and rise of consumer markets
all across the African continent.

~ Dr. Bongo Adi, Pan-Atlantic University

Known for a long time as the “next growth frontier,” Africa will continue to attract significant FDI, “despite short-term challenges,” says Yinkere. The challenges include concerns about upcoming elections, as in the case of Nigeria, where the ruling Peoples Democratic Party will face the All Progressives Congress opposition in February next year, as well as insurgencies. But Yinkere says these are “transient and will not be able to derail the long-term prospects of the continent.”


A significant potential downside to the growth prospects, Yinkere notes, would be a severe shock to the world economy that could restrict the flow of resources into the continent. This contingency is also underlined in the IMF’s projections on Africa, especially sub-Saharan Africa. 

“Rising global economic and financial ties have been a boon for the region, but vulnerabilities to external shocks have also increased,” it notes. This is so, it explains, because of globalization, as a result of which these economies “increasingly move in synchronization with other economies outside the region, especially China, but also Europe, which remains an important trading partner.”

Adi agrees. The dynamics of the international commodities market, he points out, will shape the course of African markets in the coming years—as will the residual echoes of quantitative easing. Such outside forces will ultimately dictate events across the continent.