By Stella Mambo, Director, Global Markets at Absa Bank Kenya PLC
As the global economy grapples with challenges posed by high inflation and rising interest rates, countries worldwide are adjusting their economic policies in a bid to spur growth. Amidst geopolitical tensions, shifting trade dynamics, and the turbulence of the post-pandemic world, African nations are also grappling with a complex landscape that is reshaping their capital markets.
Despite the continent’s rapid population growth and the increasing need for capital investment, African countries are facing challenges in attracting investments. Global capital flows are shifting away from emerging markets, favoring the relative stability of developed economies, while geopolitical risks—exacerbated by the COVID-19 pandemic and supply chain disruptions—have created fiscal strains. Currency fluctuations and rising global interest rates have only heightened these challenges.
However, African nations have responded swiftly with significant financial market reforms. Countries like Benin, Ivory Coast, and Kenya are successfully re-entering the Eurobond market, while others are tapping into new avenues of financing, including Islamic finance options such as Sukuk and Panda bonds. These initiatives have led to the development of new debt markets, better access to multilateral funding from institutions like the World Bank and IMF, and a shift toward market-based capital structures.
In addition to these efforts, African markets are embracing innovative financial instruments. Products such as Repurchase Agreements (REPOs), Total Return Swaps (TRS), securities lending and borrowing, and asset-backed securities are being explored as part of a larger drive to enhance the attractiveness of African markets to investors from developed economies. These solutions are gaining traction as more sophisticated capital instruments become a key part of the investment landscape.
Efforts to reinvigorate local investor participation are also underway. Many African markets have seen capital withdrawals, leading to stock undervaluations. To address this, regulators are working to reduce the costs of these new financial products and enhance cross-border market access within the continent. Structured notes and Exchange Traded Funds (ETFs) linked to various asset classes, such as interest rates, credit, and inflation, are emerging as important vehicles for investors seeking alternative investments.
Deregulation, too, is becoming a significant part of the narrative. In a shift towards a more business-friendly environment, President Donald Trump’s remarks at the World Economic Forum, highlighting a new era of deregulation in the U.S., could resonate in African markets. Many African regulators are adopting a similar approach, focusing on creating more adaptive, responsive, and robust financial environments. For example, Kenya’s financial regulators have signaled plans to introduce infrastructure funds and draw inspiration from international markets like India, which has successfully implemented money market funds as an alternative distribution model.
These reforms are expected to boost investor confidence in African capital markets, with potential benefits ranging from improved liquidity to enhanced access to global funding markets. Analysts believe that nations embracing these reforms will be better positioned for growth in the face of economic uncertainty. In particular, Kenya’s strong outlook—marked by reduced inflation, increased economic growth, stable foreign reserves, and improved currency stability—positions it as a prime candidate for further investment.
As African nations continue to strengthen their financial markets, the Absa Africa Financial Markets Index (AFMI) is expected to play a key role in signaling these improvements to global investors. These developments may pave the way for a more efficient capital flow across markets, as countries align themselves for a stronger recovery as global financial conditions stabilize.
The future of African capital markets is undeniably shaped by the reforms taking place today, with optimism gradually building for a more resilient and dynamic financial landscape across the continent.
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