AFRICAN FINANCIAL MARKETS MOVING UP INVESTMENT DESTINATION LIST

Mauritius may be a favoured holiday destination but doesn't often come to mind as a leading financial markets destination in Africa. Yet the financial market of this country, ranks in the top five of the 2020 ABSA Africa Financial Markets Index report.

The index measures the maturity of 23 of the continent's markets by assessing their openness and accessibility, and guides policymakers on steps they can take to deepen and improve their markets to attract local and global investors. The index is produced by the Official Monetary and Financial Institutions Forum in partnership with ABSA. In the four years since its launch, the index has recorded a steady improvement in African financial markets: in 2017, just six out of 17 countries in the index achieved overall scores of more than 50 out of 100, while this year, 11 out of 23 countries scored more than 50.

The overall score is an aggregate of ratings on six different measures, the first of which is the market depth - including the size of the markets relative to GDP, their liquidity and the diversity of products offered. ABSA's report on the index notes that the market depth of most countries deteriorated this year as the Covid-19 pandemic negatively affected market capitalisation and activity. But while the health and economic issues arising from the pandemic have been the dominant factor this year, the focus will now shift to recovering from the pandemic. Attracting investment to reaccelerate economic growth, and developing financial markets will be important for this, says George Asante, head of global markets for regional operations at ABSA Corporate and Investment Banking.

ABSA's report notes that despite the pandemic, Mauritius grew its markets after introducing changes such as opening up to international central securities depositories and launching a new primary dealer system. It also points to the Covid-19 as having presented opportunities to develop capital markets with the African Development Bank issuing coronabonds to help finance responses to the pandemic in March.

Mauritius has ranked second on the Africa Financial Market Index Report for the Market infrastructure and tax environment being favourable to foreign investments.

Pillar 1 considers the size and liquidity of local financial markets, as well as the diversity of products available. On average, countries' scores dropped by 0.6 from last year. This partly reflects the decline in local equity indices as markets reacted to Covid-19. Liquidity was more mixed, as a fall in foreign investor activity in equities was partly offset by central banks and local investors in bond markets. Mauritius maintained third place. In early 2020, the Stock Exchange of Mauritius announced it had amended trading rules to open its market up to international central securities depositories such as Euroclear and Clearstream. This allows foreign investors who invest in debt securities, Eurobonds and exchange-traded funds on the exchange to transfer these securities directly via the ICSD to other investors. The initiative is aimed at making the market more attractive to international investors. Mauritius and South Africa are the only markets in the index with such links to ICSD.

Pillar 2 evaluates African markets' openness to foreign investment based on the ease of moving capital, liquidity of foreign exchange markets, rigidity of foreign exchange regimes and availability of reliable foreign exchange data. It considers countries' resilience to volatility by measuring portfolio flows against foreign exchange reserves. Since the first edition of the index in 2017, several countries have loosened capital controls and moved towards more flexible exchange regimes. On average, scores in this pillar were largely unchanged. Generally, countries maintained strong reserve positions, although there was more variability in foreign exchange activity.Mauritius has high net portfolio investment but is less vulnerable to foreign exchange fluctuations despite the high ratio to reserves. The significant inward flow is due to its position as a favourable domicile for investment funds, often comprised of international money invested globally.

A healthy market environment is key to attracting capital. Pillar 3 scores countries based on regulatory frameworks, tax systems and market transparency. Overall, countries perform best in this pillar, scoring 67 out of 100 on average. This is unchanged from last year, but has improved from 63 in the inaugural 2017 edition of the index. On the measures used in this survey, Morocco and Mauritius offer the most attractive tax environments overall. Both have low levels of withholding taxes and a high number of double taxation treaties with other countries. Mauritius generally has no withholding tax on dividends, but some are specified in tax treaties.

The quality of financial reporting in Mauritius and Tanzania was praised. Both rank highly in this pillar overall. One respondent in Mauritius said the next step for regulators should be to look at making financial reporting using XBRL, the globally recognised format for digital accounts filing, more efficient. 'It should be possible to generate the XBRL file directly from a company's accounting system and upload it to the database of the registrar of companies.' This would make the process of collecting data and converting them into reports for regulators and other end-users more efficient, increasing market transparency

Local investors' willingness to invest in domestic markets can have a significant impact on market development and growth. Pillar 4 measures local investor capacity based on the amount of pension fund assets available in the country relative to the population and market capitalisation. Countries tend to perform poorly in this pillar, especially if their pension systems are not yet well established. However, this pillar shows the greatest improvement from last year, with country scores climbing by 3.2 on average due to growing pension assets.

Among index countries, there is high disparity in the amount of pension fund assets relative to the size of the population. Mauritius, South Africa, Seychelles and Eswatini have pension assets per capita exceeding $1,000. Morocco is just below at $938, while all other countries are significantly lower. Mauritius launched its MauCAS payments system, which routes transactions made through cards and mobile phones for settlement at the Bank of Mauritius. The new system makes it easier for new payments firms to provide services to existing bank account holders, creating opportunities for fintech firms.

Pillar 5 assesses countries' macroeconomic performance, export competitiveness and banking sector health. It evaluates the quality of governance based on external debt management and financial sector transparency. On average, country scores improved by 1.1, subdued partly by adjusted growth forecasts reflecting the impact of Covid-19. Before the Covid-19 upheaval, many countries' banking systems were in strong positions. Egypt, Ethiopia, Mauritius, Namibia, Rwanda, Seychelles, South Africa and Lesotho had NPL ratios of less than 5% of total loans in 2019. A low NPL ratio can help banks keep credit open to the real economy during a crisis and provide finance for the recovery.

Alignment with internationally recognised legal and contractual frameworks help mitigate risk and boost investor confidence. Pillar 6 scores countries based on the enforceability of close-out netting locally, adoption of standard master agreements and the strength of insolvency frameworks. Mauritius and South Africa lead Pillar 6 because of their adoption of the three global master agreements regarding derivatives, repos and securities lending. The agreements are fully enforceable and widely used by banks and firms in both countries.

Mauritius and Kenya earn points for improved resolving insolvency scores. The World Bank said both had made resolving insolvency easier by improving the continuation of the debtor's business during insolvency proceedings. Mauritius and Kenya have the highest resolving insolvency scores in the index.