The growth of the pension funds, insurance and mutual fund industry together with the rollout of more sophisticated trading and settlement infrastructure is accelerating the overall development of capital markets in Africa, says Standard Bank.
Hari Chaitanya, Head of Investor Services Product Management, Transactional Products and Services at Standard Bank, says while most capital markets in Africa have relied mainly on foreign investment to date, the domestic institutional investment will also be a major driving force in the future.
Growth of the capital markets for the last 5-7 years was driven primarily by foreign investors, particularly via portfolio flows or private equity deals. The market capitalisation of stock exchanges in sub-Saharan Africa grew by only 4% in the last decade, but it is now accelerating at closer to 19%.
“In the future we feel that the foreign investment part of the growth equation will continue, but the future will also be driven by domestic institutional investors in Africa, which is on a growth curve,” says Mr Chaitanya.
Local pool of capital has emerged as a major driver of Africa investment. African Pension fund capital has reached USD 330 billion and is growing rapidly. Increasing adoption of insurance is resulting in insurance investment capital to grow to around USD 270 billion by 2018. With these trends, Africa is emerging as one of its own key investors.
Kenya and Nigeria have opened up their pension industries over last 8-10 years, with Ghana doing the same over the past few years and more recently, Tanzania and Zambia. In 2014, sub-Saharan Africa had 24 stock exchanges, 19 of which had automated trading systems in place. In the past five years, 6 countries implemented new central securities depositories.
Improved political and social stability, combined with good GDP growth has also led to changes in investor perception. All these factors have laid the foundation for growth of investments and greater depth in these markets.
While liquidity is still regarded as a challenge, there has been material improvement in recent years, with Nigeria’s market capitalisation growing from USD22bn (2005) to USD117bn (2014), Botswana’s from USD13bn to USD47bn and South Africa’s from USD567bn to USD1.1trn. A steady increase in new listings is also expected to increase the amount of stock available in the market going forward.
Mr Chaitanya says that outside of South Africa, the main countries in the region with sizeable pension fund assets are Nigeria, Kenya, Botswana and Ghana.
“Pension fund reforms are a hot topic in Africa and will see increased participation from the formal and informal employment sector. A vast majority of African citizens don’t contribute to pension schemes,” he says. However the environment is changing through regulation and reforms.
In Kenya, the National Social Security Fund (NSSF) is looking to transform its structure from a National Provident fund scheme to a Social Insurance Pension Scheme to achieve higher participation from the country’s work force.
Ghana, meanwhile, has opened up the pensions market by including the previously excluded informal sector which covers 80-90% of the working population. Zambia plans to list at least 3 companies every year to meet with the demand of the National Pension Scheme Authority’s investments.
In Tanzania, regulatory changes have brought in process efficiencies in the trading and settlement of government bonds and Treasury Bills in the market.
Africa has experienced substantial growth in pension assets over the last five years. In much of sub-Saharan Africa where pension systems are older, growth rates have been lower, ranging between 8% and 18% over the previous five years. Assets in East Africa have grown in excess of 20% on a consistent basis only overshadowed by Nigeria, which has seen growth between 25 % and 30%. These trends will continue as this young continent moves towards increased coverage, and more inclusive and comprehensive systems.
Similarly, insurance penetration is expected to grow significantly across all African markets over the next five years. It is clear globally that higher penetration ratios lead to greater Assets under Management (AUM) resulting in larger pools of domestic capital. The overall increase in AUM of African insurance companies from 2012 to 2018 is expected to be 38%. Mr Chaitanya says while volatility has been the order of the day for 12-18 months in markets around the world, the longer-term story for sub-Saharan Africa continues to be positive.
“There may be temporary fluctuations, but the broad economic trend is still positive. An increase in local institutional flows comes at a very opportune time, as it will create a more balanced growth story by offering a counter-balance to any short-term and unpredictable withdrawals of foreign flows,” he says.
Intra-African investment within trading blocs like the East Africa Community, meanwhile, will also be a driver of growth. These initiatives are being driven by global trends, but also by the needs of investors in these markets, who are looking for broader investment opportunities beyond their own markets. And if sub-Saharan Africa continues to expand at current levels that growth cannot just be met by bank lending and FDI.
“The corporate sector has to raise money in capital markets and the more efficient the market is, the easier it is for the corporate sector to raise capital from the stock market, which is also better for overall economies. When that cycle works well, that is a sign of a good economy,” says Mr Chaitanya.Back to all news
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