Picture: 123RF/THANANIT SUNTIVIRIYANON Over the past decade, African economies have undergone a period of significant transition. Foreign investment interest has grown and there has been an extensive focus on the continent’s potential for mobilising local resources.
However, as we begin 2021, African countries are facing immense challenges arising from the global Covid-19 pandemic. The resilience of financial systems in every economy is being tested. Financial markets have been disrupted, but expansion and innovation in recent years should benefit the eventual rebound and recovery.
The longer-term outlook largely relies on the extent to which economic activity can resume in the local and global economy, but recent progress in financial market development will improve Africa’s chances of making a rapid and sustainable recovery. Despite the difficulties posed in 2020, some significant market developments and policy changes will help to boost growth and the sustainability of financial markets across the continent.
The initial effect of the pandemic was hardest felt by those countries with high levels of external debt, as global investors pulled back on investments. The withdrawal of international capital hit the region’s stock markets as liquidity dropped in the first half of 2020. The sudden fall in foreign activity showed the value of having deep and liquid local markets able to withstand external shocks. Central banks and financial policymakers across the continent responded by supporting local debt markets with a variety of tools, which have assisted greatly in mitigating the disruptive effects of the pandemic.
For money markets in particular, central banks across the continent have provided emergency liquidity throughout 2020 to quell the panic that struck in March and April, and markets have mostly calmed since.
To promote the functioning of domestic financial markets, some African central banks used the less conventional monetary policy tools developed over the past decade. The SA Reserve Bank, for example, implemented a programme of purchasing government securities on the secondary market. The central banks of Botswana, Egypt and Ghana also conducted asset purchases. The Bank of Central African States, which serves Cameroon, undertook purchases in a restricted way to ensure consistency with rules against direct monetary financing. Other, more common, policies included reducing repo rates, widening the collateral accepted for central bank lending facilities, and reducing liquidity and capital requirements for banks.
Linking exchanges
Much progress was made in linking exchanges within African financial markets over the past year or so. The Africa Exchange Linkages Project (AELP), for […]
