Financial Insight Zambia believes in financial markets. They are part of the reason why our analysts work tirelessly to decode the nuances in the numbers of listed companies. This November is special. Our founder was invited to moderate a panel discussion of key stakeholders that are in the ecosystem of capital markets at the Absa Africa Financial Markets Index event hosted by Barclays Zambia at Intercontinental hotel.
We are in agreement with Akinwumi Adesina (President of the African Development Bank) who believes that Capital markets play a vital role in Africa’s future. However, they continue to be fraught with fragmentation and are shallow in comparison to their equivalents in Latin America and Asia. Furthermore, Jingdong Hua (Vice-President and Treasurer International Finance Corporate) believes that policymakers must recognise that capital markets are as important as social and physical infrastructure. On the upside, Hua has seen the rise of a new generation of African leaders who are embracing the long-term view through their acknowledgement that the development paradigm has change hence the importance of prioritising the private sector.
This is why Maria Ramos (Chief Executive Officer, Absa Group) believes that greater co-operation and collaboration between African countries will be the fundamental building blocks for sustainable economic development, accelerating industrialisation and the achievement of inclusive growth.
The 2018 edition of the Absa Africa FM index takes us further into Africa’s financial markets than ever before. The report assesses progress and potential across six key areas: market depth; access to foreign exchange; market transparency, tax and regulatory environment; macroeconomic opportunity; and the legality and enforceability of standard financial markets master agreements.
This year Zambia was ranked 8th (ranked 9th in the inaugural report of 2017). The one place upward movement is indicative of efforts that have gone into place in terms of improving the performance of key parameters that go into measuring the index. Of note however, is the significant strides that have been made around the relaxation of capital controls which supports growth of foreign exchange market. This has been the fundamental reason why capital is able to freely flow in and out of Zambia.
A closer look at each of the pillars shows that Zambia ranked well in pillars that address Market depth, access to foreign exchange, and legality and enforceability of standard financial markets master agreements. However, the country’s ranking was poor in pillars relating to market transparency, tax and regulatory environment, capacity of local investors and macroeconomic opportunity.
Pillar 3 addresses improvements in Africa’s regulatory and tax environments, which play a critical role in developing an attractive domestic capital market. A handful of countries in Africa have focused on regulation to bolster market development and attract foreign investors. Under this Pillar, Zambia’s weakness can be seen in how the tax environment is being managed, lack of credit ratings for corporates, financial information availability and to subtle extent market development.
For the countries that performed well under Pillar 3, measures such as exemption from withholding taxes, signing of treaties to avoid double taxation and tax holidays on income earned on bonds appear to be the measures that have earned them higher ranking. Furthermore, analysts believe a regulatory environment that has simple and relatively low tax rates being applied to returns on some investments is also key to the promotion of participation. However, there is an oxymoron in that where tax incentives may benefit and attract foreign investment, which may not be the case of SMEs.
Pillar 4 for assesses the capacity of local investors. Zambia performed poorly in relation to pension and insurance assets to domestically listed assets, weighted by asset liquidity and pension fund assets under management per capita.
According to the report, local investor capacity in Zambia is low, with pension funds, insurance firms and other investors lacking sizable assets under management (AUMs). At the moment, the country’s ratio of institutional AUM to domestically listed assets is below 20%. When compared with the likes of countries such as South Africa, they come in at over 40%. This contributes to low demand for new products and results in small and relatively inactive local exchanges.
There is hope on the horizon though with the proliferation of mobile banking it has helped promote financial services in informal sectors of the economy and unbanked areas. The technology and infrastructure supporting mobile banking is being built up. Strategy’s such as Uganda’s national Financial Inclusion Strategy 2017 – 22 aims to lower barriers to financial services and build the infrastructure needed to support the mobile banking market. A review of Zambia’s 7 national development plan shows that the target for mobile money services is 50% (was 14% in the 2016 baseline year) by 2021 which is indicative of strides being made that could potentially improve Zambia’s score. However, there will be the small matter of ensuring that there market products are available and are accessible to the general public.
The last Pillar in which Zambia under-performed was number 5 which assess the macroeconomic opportunity. Under this pillar, the areas that attributed to the weakest of all the scores was the country’s debt profile, macro data standards and living standards (by comparison to the other 19 countries).
Although Zambia is strong when it comes to MPC, financial risk (non-performing loans and external debt) and financial transparency rank lowly. With MPC, the report notes that reporting on it is timely hence the high score in comparison with other countries. However, protracted release of critical economic information harms the score. Clear and timely reporting of macroeconomic indicators and monetary policy actions helps build investor confidence. According to the report, promising performance of some countries in parts of Pillar 5 is held back by poor performance in others, notably macroeconomic reporting standards which is seen as one of Zambia’s weakest links under this pillar.
Another area of concern is the challenge of promoting inclusive growth amid high levels of inequality. Zambia has been seen trying to address this through the aggressive infrastructure growth. Under development of infrastructure limits productivity, trade and overall mobility.