Currency fluctuations across the African continent remain one of the reasons why the development of capital markets that seek out foreign investment has lagged behind in terms of development, according to The World Bank.
“Although financial investments are becoming increasingly international, their currency denomination should become increasingly local to match projects’ risk profiles”, according to Jingdong Hua the Vice-President and Treasurer at The World Bank in the Absa Africa Financial Markets Index 2019 Report published in Q4 2019.
The recently published index which is now in its 3rd year of production has become a benchmark for the investment community and Africa generally to gauge countries’ performance and highlight how they can learn from others.
Emerging market firms that borrow in US dollars but accumulate cash in domestic currency are vulnerable to a depreciation of the domestic currency against the dollar. “Because currency depreciations often follow economic shocks, foreign currency borrowers with local currency earnings are simultaneously burdened by economic hardship and increasing debt service obligations”, according to Jingdong.
Zambia which is ranked 8th in the index for a second year in a row, has shown improving regulatory and legal frameworks but raising capital locally remains a big challenge for the development of the local capital market. The report cites “weak capacity of local investors”.
Local investors have often lamented the cost of capital in Zambia. Despite a single-digit monetary policy for the most part of 2018 and Q1 of 2019, access to cheap capital remains a big challenge. The market has been starved of liquidity due to Government participation in the bond market as they have sort domestic commercial financing for infrastructure projects.
However, in the 2020 budget speech, Dr. Bwalya Ngandu indicated that in the coming year, Government would participate less hence this may inspire more availability of cash on the local market. The central on the other hand will keep a close watch on inflation which has now entered double digits for the first time in as many quarters, way beyond the target range of 6 to 8 percent. MPC remains one of the critical tools for the central bank to rein in inflation.
Private Sector Participation Key in Capital Market Growth
The index report also points out the importance of the private sector in the growth of capital markets in Africa.
“A strong and dynamic private sector can unlock jobs and opportunities for better lives, and is therefore instrumental in attaining development objectives”, read a statement by Ludger Schuknecht, the Deputy Secretary-General for the Organisation for Economic Co-operation and Development. “Fortunately, the international community is paying increasing attention to the important role of the private sector as a motor of progress”.
Nurturing the growth of Zambian businesses requires an open and enabling investment environment as well as access to finance. That is why despite being ranked overall in the index, the report shows that the country is weakest in Macroeconomic opportunity (Pillar 5 in the Absa Capital Market Index).
Pillar 5 evaluates economic performance, financial risks, and financial transparency, as demonstrated by the availability of data, open monetary policy communication and the timely release of state budgets.
According to the report, Zambia scored lowly under Pillar 5 due to its weak position on GDP growth, living standards, Growth and absolute export market, and debt profile. However, under the same pillar, the country improved its score on budget-related items, with more accessible budget reporting accompanied by spending breakdowns. Evidence of this can be seen through the frequency of the Minister of Finance’s economic updates which have now become standard every quarter.