Last week ABSA Bank released the fourth edition of their Africa Financial Markets Index (afmi) 2020, which noted that it was a difficult year for the continent’s markets it was not all doom and gloom.
The index measures the capacity of the continent’s capital markets to efficiently carry out their functions – mobilising resources internally and from abroad.
An additional function that capital markets play is that they serve as an objective indicator of the health of an economy.
Government can say all they want about their economies, but the countries markets, in what state they are, are a reflection on what investors think about the country’s economy.
The afmi measured the capital markets in 23 countries on the continent. It tested for market depth, access to foreign exchange, market transparency. Local investor capacity, macroeconomic opportunity and the legal framework and enforceability of key market agreements.
"Uganda held its 10th position for the second year running scoring well on market transparency, tax and regulatory environment, macro economic opportunity and access to forex....
While you would like to perform well on every score you want to do particularly well on market transparency.
This means that players in the market can determine what the rules of the game are objectively, that they are practical and predictable. Without this any investor worth h is salt will struggle to see how they make money or if their investment can be returned in case they change their mind.
Capital hates uncertainty, steers clear of it like the plague and would rather settle for the promise of lesser returns than risk getting involved in uncertain markets.
It was also interesting that we scored second only to South Africa in the perceived access to foreign exchange.
This a very powerful incentive for portfolio investors, the type of whom buy our shares or bonds from abroad. It means when they receive a dividend or cash out on their investment they don’t struggle to repatriate their earnings. This is important because to attract credible investors they have to be sure that when they want they can not only get their money but convert into a hard currency of their choice. It one of those counterintuitive things about capital, the easier it can flee your market the more it will be likely to park there.
Also to be noted that despite the hit from Covid-19 macroeconomic opportunities are still there. While growth took a bad hit and the election period dampened economic activity, there is still opportunity going forward given how the economy was handled during the crisis.
Uganda fared dismally in local investor capacity, legality and enforceability of key agreements and market depth.
Our failing is where the action is. The index measure the local capacity variously but most tellingly as pension assets per capita --$76 in Uganda’s case compared to the more than $1000 in the top five countries and also against the market capitalisation, in Uganda’s case that was a lowly 38 percent compared to continental champion Namibia, which had more pension assets than the capitalisation of their capital markets.
We know that the pension markets is very shallow with NSSF accounting for more than seven in ten shillings in pension assets. The need to get more players is a valid one especially since only about three million of the 14 million working force is enrolled in a pension scheme of any sort.
At an individual level the importance of having savings can not be overemphasized, but this is even more important if countries can pool resources, especially long term money, which can be deployed to finance those development projects that the banks short term money can not help.
But even if we mobilised larger pools of long term savings the challenge in Uganda, afmi shows, is that our markets lack depth in terms of the variety of securities and bonds one can deploy.
There are 15 companies listed on the exchange of which nine are Ugandan and the liquidity, how much shares change hands, is low and concentrated among just three companies.
The government has it within its power to compel more companies to list, especially the private companies. In addition government can look to off load some of its public enterprises – not many now, but they could serve as a good boost to the questions surrounding the lack of depth in our markets.
In this uncertain times it is even more important that we have our own mechanisms for raising local funds, beyond going bowl in hand to western capitals. And it is not impossible.
The treasury bill and bond auction are an example of how we can raise billions of dollars a year in local currency by ensuring the credibility and consistency of these mechanisms. Granted that there has been little love for these instruments beyond the primary market but at least the mechanism is there it has been tested and shown to be durable for the last 25 years at least.
The afmi should be referred to by all people involved in ensuring the economic well being of this land. Especially because the kind of credible investors we are trying to attract are paying attention to it.
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