Finance in Africa E-Book

• Herausgeber: European Investment Bank
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 275

Veröffentlichungsjahr: 2024

Beschreibung

This is the European Investment Bank's ninth annual report in this series, which covers Africa's banking system, financial markets, digitalisation/fintech and climate finance. It draws on the EIB Banking in Africa Survey 2024, carried out between February and March 2024. The survey covered 51 banks across sub-Saharan Africa and the report draws on evidence from the World Bank Enterprise Surveys and a range of other data sources.

Leseprobe

FINANCE IN AFRICA

Unlocking investment in an eraof digital transformation and climate transition

About the European Investment Bank

The European Investment Bank Group is the EU bank and the world’s biggest multilateral lender. We finance sustainable investment in small and medium-sized enterprises, innovation, infrastructure, and climate and environment. We have financed Europe’s economic growth for six decades and are at the forefront of EU crisis response, leading the world in climate investment and backing development of the first COVID-19 vaccine. We are committed to triggering €1 trillion in investment in climate and environmental sustainability to combat climate change by the end of this decade. About 10% of all our investment is outside the European Union, where our EIB Global branch supports Europe’s neighbours and global development.

Table of contents

Foreword

Executive summary

1. Financial markets and financing conditions

2. Economic development and access to finance

3. Banking sector trends in sub-Saharan Africa

4. Regional banking performance

5. Digital financial services in Africa

6. Climate finance and investment in sub-Saharan Africa

7. Partnering with Africa

About the report

The Finance in Africa report is a product of the EIB Economics Department, providing an analysis of recent developments in the African financial sector and specific structural topics of relevance. It combines in-house research with contributions from leading market experts from commercial banks operating in the region, international finance institutions and other institutions. This report was prepared on the basis of data available in June 2024.

Main contributors to this year’s report

Report directors:

Barbara Marchitto and Debora Revoltella

Report coordinators:

Colin Bermingham, Moses Nyangu and Ricardo Santos

Communication

project manager:

Daniel Berze, under the direction of Valentina Kalk, head of publications

Editing:

Tamar Vidon, under the direction of Valentina Kalk, EIB Linguistic Services and Charlesworth Author Services

Coordination:

Nathalie Gilson, senior operational assistant

Executive Summary:

Debora Revoltella

Chapter 1:

Colin Bermingham, Emmanouil Davradakis, Moses Nyangu, Ricardo Santos and Daniella Seberini

Chapter 2:

Colin Bermingham and Frank BetzBox 1 by Arthur Minsat and Elisa Saint Martin (both OECD Development Centre)

Chapter 3:

Colin Bermingham

Chapter 4:

Colin Bermingham, Frank Betz, Emmanouil Davradakis, Nomfundvo Dlamini, Kevin Koerner, Moses Nyangu, Ricardo Santos and Christoph WeissBox 2 by Grakolet Arnold Zamereith Gourène (Making Finance Work for Africa)

Chapter 5:

Alfredo BaldiniBox 1 by Patrick Conteh (Africa Fintech Network) and Matseliso Teele (MFW4A) Contributions by Ayushi Gupta (Tellimer) and Tatia Dzaptashvili (GPCA)

Chapter 6:

Joana Conde and Ricardo SantosBox 1 by Nxalati Baloyi and Dr Stuart Theobald (Krutham)Box 2 by Paola Casati (University of Bari, Taranto, Italy) and Fotios Kalantzis

Chapter 7:

Tessa Bending, Colin Bermingham, Carolina Herrero, Matteo Gatti and Ioanna-Victoria Kyritsi

Acknowledgments

The EIB wishes to thank, first and foremost, the staff and management of the African banks who generously gave their time to complete the EIB Banking in Africa survey, 2024. We thank all the colleagues from the EIB, Making Finance Work for Africa Partnership (MFW4A), Africa Fintech Network, Tellimer, the Global Private Capital Association (GPCA), Krutham, the University of Bari and the Organisation for Economic Co-operation and Development (OECD), whose contributions supported and enriched this report. In particular we would like to mention: Nxalati Baloyi (Krutham), Sanja Blatt, Marius Chirila, Carmelo Cocuzza, Patrick Conteh (Africa Fintech Network), Marc-Antoine Coursaget, Tatia Dzaptashvili (GPCA), Grakolet Arnold Zamereith Gourène (MFW4A), Ayushi Gupta (Tellimer), Fotios Kalantzis, Kristina Kanapinskaite, Eleni Kyrou, Patrick Le Goff, Christophe Litt, Arthur Minsat (OECD Development Centre), Sonja Mohnen, Davide Monguzzi, Rosa Olivares, Emma-Jane Paul, Paloma Perez De Vega, Elisa Saint Martin (OECD Development Centre), Markus Schulte, Pascal Simon, Inmaculada Soto Riba, Jean-Philippe Stijns, Matseliso Teele (MFW4A), Dr Stuart Theobald (Krutham), and Peter Zajc. Thanks also to Debora Revoltella and Barbara Marchitto for reviewing early versions of each chapter. The EIB acknowledges the research assistance of Nomfundvo Dlamini on various chapters of the report.

Foreword

Africa has the potential to become a catalyst for global change. With its vast landscapes, a youthful population and a wealth of untapped resources, it could be the continent that drives the global green transition of the 21st century. With the right investments – in infrastructure, education, health and climate – Africa will be able to overcome the challenges it faces. The European Investment Bank remains the ideal partner for supporting these much-needed investments.

Our commitment to closing investment gaps extends well beyond Europe’s borders. The European Investment Bank is a key contributor to Global Gateway, the EU strategy for narrowing global investment gaps for vital infrastructure. Our reach is truly global, with operations in more than 140 countries beyond Europe – and in almost all African countries – building on decades of development experience. We have been investing in Africa since 1963, financing a wide range of projects that support sustainable economic development.

Partnership is at the core of the European Investment Bank’s work. We deliver all our investments through partnerships, which enable us to expand our reach, maximise our impact and transform lives. For example, the Bank supported the supply of COVID-19 vaccines for low- and middle-income countries as part of COVAX, a historic multilateral effort to battle the pandemic, of which many African countries were beneficiaries.

Our projects in Africa across a range of sectors are producing tangible results. The Bank signed operations worth more than €3 billion across the continent in 2023. These projects are expected to provide safe drinking water to 1.7 million people, create 115 800 new connections to electricity networks and sustain 614 000 jobs in small firms and mid-caps.

Africa is still recovering from the global shocks of recent years, but growth is picking up, economic imbalances are diminishing and access to financial markets is improving. The banking sector’s continued resilience to recent shocks has helped the continent respond to challenges, but more efforts are needed to improve the availability of finance.

Our actions reverberate globally. This report highlights some of the remarkable achievements of the African financial sector and shows the way forward in new areas of partnership, which can drive further positive change for the people of Africa.

Debora Revoltella

Director, Economics Department

European Investment Bank

Executive summary

The world is changing, and economic relationships increasingly follow geopolitical fault lines. The European Union’s partnership with Africa has long been crucial, and bringing the two continents even closer together is key to the global promotion of European economic and security priorities – one of four cornerstones of the EU strategic agenda. The joint European Union-Africa strategy focuses on various priorities, including sustainable growth and human development.[1] This strategy is consistent with the priorities of Global Gateway, an EU investment vehicle aiming to tackle critical investment gaps across the world. The inaugural milestone of the Global Gateway was the Africa-Europe Investment Package, with approximately €150 billion of investment dedicated to strengthening cooperation with African partners. The European Investment Bank (EIB) has been a key player in the Global Gateway, participating in 110 of the 168 Team Europe initiatives.

Increased financing is needed on the African continent to reach development goals and climate targets, which will require enhanced domestic financial markets and more international financial flows. Africa needs additional financing of about $194 billion a year to achieve the UN Sustainable Development Goals (SDGs) by 2030, equivalent to 7% of African gross domestic product (GDP).[2] However, this is against a background of declining global capital flows and weak development of domestic credit markets. Development banks play a vital role in growing domestic financial markets, providing international capital flows and catalysing greater private sector development. This report helps identify gaps and opportunities in the African financial sector.

Although economic challenges – particularly inflation – persist, 2024 will hopefully be a turning point for the economic and financial pressures facing African countries. Some problems undoubtedly still need resolving, with several African countries not reflecting the downward trend in inflation seen across the world (the 2024 rate might actually be marginally higher than the 17% observed in 2023[3]). This situation could delay or slow a loosening in monetary policy on the continent, which would affect private sector financing. Nonetheless, economic growth is expected to increase in Africa in 2024 and 2025, with growth in the five-year period between 2024 and 2028 potentially being the fastest on record since 2008-2012, as the drag on economic activity caused by recent global shocks begins to fade.[4]

The EIB financial conditions index points to a loosening in financial conditions following a severe tightening from mid-2021 to mid-2023. The financial conditions index initially covered four countries when it was introduced in last year’s Finance in Africa report, but has now been expanded to ten countries across the continent. The index shows that the tightening in financial conditions was worse for some of the larger countries such as Nigeria, Kenya and Egypt, which faced significant macroeconomic difficulties during the period. There appears to be a loose relationship between changes in sovereign creditworthiness and the financial conditions index at the country level, and financial conditions in countries with better fundamentals are generally back to their pre-pandemic state. The loosening in our financial conditions index is mirrored by an improvement in sentiment on global capital markets, which – starting from late 2023 – has benefited the bond yields on African sovereigns, resulting in some countries (such as Benin and Côte d’Ivoire) regaining access to international bond markets. Declining bond yields also indicate that markets are less worried about a fresh wave of sovereign default in Africa.

Sovereign debt issuance may have been low in 2023, but sustainable debt issuance remained buoyant. Sustainable debt issuance involves various debt instruments, including green bonds, social bonds and sustainability-linked loans. Sustainable debt increased sharply in 2021, driven by a large increase in issuance in Southern Africa and continued activity by multilaterals. The government sector is the dominant issuer of this debt type, but financial firms have become increasingly active over time, especially since 2021. There is also evidence of a greenium (a green premium) in the issuance of green bonds by multilateral development banks in Africa, meaning yields are lower on green bonds than they are on non-green bonds. However, the greenium is relatively small and only evident for longer-maturity debt (more than three years in tenor). In advanced markets, there is evidence of a small greenium at shorter maturities.[5]

Despite encouraging trends in some financial markets, progress on some development metrics is slow in Africa and the lack of finance is an ongoing issue. Africa is a high-growth region – only developing Asia is typically able to outpace it in this area. However, at 3.1%, Africa’s share of global GDP has barely moved over the last 20 years and income convergence with developed countries is very slow. A factor frequently cited as restricting development in Africa is the relatively low level of industrialisation on the continent, while agriculture retains a very high share of GDP – something that has also not changed in 20 years. Africa’s low participation in global value chains is another factor linked to low industrialisation and slow private sector development.

Various bottlenecks – including a lack of infrastructure, a shortage of skilled workers and a lack of access to finance – are impeding development in Africa. Addressing these problems could unlock major development potential. Domestic and external sources of finance have dwindled over time. In recent years, Africa has experienced declines in foreign direct investment, overseas development aid, portfolio flows and cross-border bank flows. Domestically, government revenue as a share of GDP is 18%, which is well below that of other developing regions, further limiting the funds available for investment. Investment and private sector-led growth are also restricted by excessive bank lending to the public sector. Our severity of crowding out index (measuring the degree to which bank lending to sovereigns constrains bank lending to the private sector, and hence private sector investment and private sector-led growth) improved in 2024 but remains high. This is mirrored by a decline in private sector credit as a share of GDP, which fell to 37% in sub-Saharan Africa in 2022 from 56% in 2007. Meanwhile, growth in private capital stock (the productive base of the economy) in Africa has not kept pace with other regions. These findings highlight the need to support the financial sector in order to underpin private sector development. Moreover, if governments can mobilise additional domestic resources while simultaneously improving fiscal metrics, there is an opportunity to support domestic investment, plug infrastructure and skills gaps and potentially lower borrowing costs for the real economy.

Banks in sub-Saharan Africa have seen profits grow in recent years, driven by the high interest rate environment. The textbook explanation for this is that interest rates on loans re-price faster than interest rates on deposits. However, this is not the reason for the recent situation in Africa. The median spread between interest rates on private sector loans and deposits has narrowed in the last three years, but banks have changed their asset mix and grown their bond portfolios (predominantly government bonds) much more quickly than their loan portfolios. Meanwhile, the spread between yields on government bonds and interest rates on bank deposits has also widened. Interest income therefore remained a key driver of profitability, but the interest was from government bond holdings rather than loans.

According to the ninth annual EIB Banking in Africa survey, economic conditions are the main concern in sub-Saharan Africa this year (cited by 77% of the banks surveyed), followed by asset quality (53% of banks). Funding issues also persist, with about one-third of banks citing a lack of capital and the cost or availability of funding as a problem. Although the provision of credit to the private sector in Africa has grown at double-digit rates over the last three years, the rate of inflation means that growth in private credit as a share of GDP has been meagre in many countries. Following the aforementioned decline in credit as a share of GDP between 2007 and 2022, progress on expanding credit markets remains elusive. This underpins the critical role of the EIB in supporting credit markets in Africa, particularly for the sectors that banks are typically less keen to finance.

Banks in sub-Saharan Africa are increasing their focus on gender balance in lending. Our survey found that 72% of banks already had a gender strategy and another 17% were planning to introduce one, which is broadly in line with the findings from 2023. This means that nine out of ten banks could soon have a gender strategy in place. In addition, two-thirds of banks have financial services or products specifically targeting women. There is some evidence that loan size differs between genders: While 59% of banks reported no difference in the size of loans to women, 38% reported that loans to female-led businesses are smaller than those to male-led businesses. However, banks continue to report better loan performance among female-led firms, with nearly 70% of banks observing lower rates of non-performing loans for these businesses. This again highlights the advantage of lending to women.

The EIB has been analysing the digital financial services environment (fintech) in Africa since 2020. This environment has experienced moderate growth over the last two years after expanding rapidly between 2020 and 2022.[6] As of January 2024, there were more than 1 263 active fintech companies in Africa, up from 1 049 in April 2022 and 450 in 2020. Payments and lending services remain the dominant fintech products, with 33% of fintech firms offering payment solutions and 19% offering lending products. Fintech firms are still heavily concentrated in Africa’s largest economies: Nigeria, South Africa, Kenya and Egypt host about 70% of fintech operators in Africa and attract about 80% of fintech funding. Nigeria is the leading country in the fintech market, with 28% of all the fintech companies on the continent.

According to the EIB banking survey, the provision of digital services is now a core offering from traditional banks, particularly in conventional services such as money transfer and payments. As a result, while banks are increasingly competing with fintechs, partnerships between the two are also common. Banks see strong incentives to partner with fintech companies, with reasons including improving customer experience (100% of banks in our survey); gaining access to innovative technology (95%); expanding their customer base (91%) and achieving cost savings (87%). With the goal of accelerating the digitalisation of financial services, almost nine out of ten banks surveyed across sub-Saharan Africa are investing in improving the digital skills of staff and management via dedicated training programmes.

Climate change is increasingly affecting the daily life of people in Africa, and banks are reporting non-negligible impact from physical climate risk, particularly in relation to small and medium-sized enterprise portfolios. A global EIB study on the impact of climate change[7] reports that nearly 90% of people in Africa believe that climate change is affecting their everyday lives, one of the highest shares for any region in the world. The EIB country climate risk model finds that sub-Saharan Africa and North Africa are among the regions that are most vulnerable to physical climate risks. Encouragingly however, only 7% of sub-Saharan African banks in our survey report damage to their physical assets due to climate risks. This likely reflects the type of physical climate risk facing Africa. African countries tend to experience chronic physical risks, related to higher temperatures, drought and sea level rise, which can have a large economic impact – particularly on agriculture and productivity more broadly – but do not tend to damage physical assets. In other regions, physical climate risk is due to extreme weather events and storms. About a third of responding banks in our survey report declines in asset quality due to climate, with the vast majority of banks (93%) identifying micro, small and medium enterprises as the most affected borrowers. However, the majority of banks (59%) say climate has not had a material impact on asset quality. This seemingly surprising result can be explained by the fact that banks tend to have low exposure to climate sensitive sectors, notably agriculture, in many countries. Despite many banks not yet seeing the effect of climate change on asset quality, a considerable share of banks plan to cut back their exposure to sectors vulnerable to climate risk.

Climate change remains a key strategic objective for most banks, with climate actions directly related to strategic ambitions. Two-thirds of banks see the climate transition as an opportunity and four-fifths have set strategic climate objectives. In the 2024 survey, banks are assigned one of four labels based on their attitude towards climate change: cautious, follower, leader or promoter.[8] Followers are the largest group (38% of banks), but leaders and promotors (24% each) are the most engaged categories, showing that nearly half of the banks surveyed have a proactive attitude on climate matters. The banks in these more engaged categories are also more likely to offer green climate products and are less likely to identify internal constraints (such as a lack of technical climate expertise) as a barrier to providing climate products. These findings highlight how increasing engagement on climate topics is the first step in increasing climate finance.

The EIB has been active in Africa for over 60 years and will continue to promote EU policy there under the guidance of the Global Gateway. Africa is our neighbouring continent and our main client outside the European Union. It received more than a third of non-EU investments in 2023,[9] helping to unlock huge economic potential in a sustainable way. The challenges are vast, but so are the opportunities. Working as part of Team Europe and in cooperation with other international development partners, the EIB will continue to provide innovative and flexible financing instruments combined with technical assistance to deliver life-changing projects.

_______

[1]The Africa-EU Strategic Partnership.

[2] AUC/OECD (2023). Africa’s Development Dynamics 2023: Investing in Sustainable Development. Addis Ababa: AUC/Paris: OECD Publishing.

[3] African Development Bank (2024). African Economic Outlook 2024.

[4]International Monetary Fund World Economic Outlook Database (April 2024).

[5] Robeco (2024). The greenium in high-rated euro bonds. White paper.

[6] For developments of digital financial services in Africa in previous years, please see EIB Finance in Africa 2022, Chapter 4.

[7] EIB (2023). The EIB Climate Survey – Africa and the Middle East.

[8] The labels are explained in more detail in Chapter 6 and represent a spectrum of engagement from banks on climate change.

[9] European Investment Bank (2024). EIB Global Impact Report 2023/2024. Luxembourg: EIB.

1

Chapter 1 was authored by Colin Bermingham, Emmanouil Davradakis, Moses Nyangu, Ricardo Santos, and Daniella Seberini, all of the European Investment Bank.

Chapter 1

Financial markets and financing conditions

This opening chapter of the 2024 report provides an overview of financial markets and financing conditions in Africa. Stock markets, bond markets and private capital markets are examined at continent, regional and country levels. The second half of the chapter focuses on financing conditions in Africa, and describes the data obtained with an updated version of the financial conditions index for Africa, which was first introduced in last year’s report.

Like elsewhere in the world in 2023, African financial markets felt the effects of tightened global financial conditions, a growth slowdown, heightened inflation, exchange rate depreciation and declining foreign exchange reserves. However, African stocks faced a more pronounced decline compared with those of emerging markets and developing economies, reflecting the greater risk aversion of global investors to Africa. The tightening of interest rates resulted in lower stock valuations and prices in Africa, with total returns (net of dividends) declining at the onset of the interest rate hiking cycle in 2021 until mid-2022 and oscillating around zero in 2023. The fall in stock prices was mirrored by a decrease in market capitalisation as a percentage of gross domestic product (GDP) across most regions, except for North Africa, where it marginally increased compared with the previous year.

Government bond issuance stagnated as yields rose significantly for more risky sovereigns in 2022 and 2023. As developed economies tightened their monetary policies, international investors assumed a more risk-averse stance and shunned debt securities from more indebted government debt issuers, especially in Africa. Consequently, Eurobond issuances by African sovereigns stagnated in 2023, except for Egypt and Morocco. Moreover, as governments became more indebted, yields started rising to reflect increased sovereign risk, and the pressure on yields was compounded by higher inflation expectations. The increase in yields was most pronounced in North and West Africa, followed by East, Central and Southern Africa. Nevertheless, with the easing of global financial conditions in 2024, four countries (Benin, Côte d’Ivoire, Kenya and Senegal) successfully tapped the international bond market after a hiatus of approximately two years, indicating that investor confidence in African economies is growing but at elevated interest rates.

African private capital markets had a resilient but difficult year in 2023. A surge in private capital fundraising in Africa, to $3.7 billion in 2023 from $2.5 billion in 2022, meant fundraising eclipsed the record of $3.5 billion set in 2019. However, private capital investments fell by 24% to $5 billion in 2023 from $6.5 billion in 2022, making it the lowest amount of capital deployed since 2020. Among the asset classes, private equity ($1.24 billion) and venture capital ($1.14 billion) experienced annual declines of 39% and 59%, respectively, relative to 2022. Private credit fell by 70% to $0.33 billion in 2023, while there was a sharp increase in infrastructure spending, which almost quadrupled from $0.55 billion in 2022 to $2.18 billion in 2023. Private capital investment has become more concentrated at the country level, with South Africa leading and accounting for half of all African investment in 2023 (20%), followed by Kenya (11%), Côte d’Ivoire (7%) and Morocco (6%). The renewables sector accounted for the largest share at 37% of investment, surpassing financial services, which had dominated in the previous year.

Financial integration increased across most African regions until the shocks caused by the COVID-19 pandemic and Russia’s invasion of Ukraine stalled or even reversed the growth. From the latest available data for 2022, financial integration ranged from 84% of GDP in West Africa to 362% in Southern Africa, with values between 104% and 116% for the other African regions. In this 2024 edition of the Finance in Africa report, the sample for calculating the financial conditions index in Africa has been expanded to ten countries from the four employed in 2023,[1] further enhancing the representativeness of the index. The financial conditions index reveals a severe tightening in financial conditions over the course of 2023, as in 2022, and this tightening is driven by policy rate increases, exchange rate depreciation and the fall in stock markets. The pressure exerted by these factors started decreasing around mid-2023, particularly for the stock market, but weaker private sector credit growth and wider lending spreads maintained tightening pressures.

African governments faced increasing financing needs as international investor appetite declined, strengthening the connection between governments and banks and increasing crowding-out effects (when banks channel their financial resources to sovereign instruments at the cost of limiting lending to the private sector). African bank holdings of domestic sovereign debt have increased sharply (to 17.5% in 2023 from 10.3% in 2010), raising the potential for bank losses in the event of a debt default or restructuring. At the same time, there is a decreasing trend in banks’ private sector lending (to 38% in 2023 from 42% in 2010), posing concerns about the severity of crowding out. The severity of crowding out index reveals that before easing in 2024, crowding out significantly tightened to record levels in 2023, driven by higher public debt issuance and a rebound in private credit demand which created intense competition for banks’ funding. Furthermore, the severity of crowding out was particularly high in 2023 in over half of the African countries examined, and regionally the highest levels of crowding out were seen in East, Southern and West Africa.

Financial markets in Africa

Stock markets

The tightening of monetary policy following the COVID-19 pandemic was the most synchronised in the past half a century. Higher inflation triggered by the COVID-19 pandemic and Russia’s invasion of Ukraine was more persistent than initially expected. Higher prices that were at first limited to commodities such as food and energy spread to inflation and became more engrained and highly correlated globally. On the African continent, inflation increased to 13% in 2022 and 19.3% in 2023 from 9% in 2019, with the most pronounced increase in West Africa (to 17.1% in 2022 and 20.4% in 2023 from 8.2% in 2019). The ensuing global monetary tightening was the most synchronised in the past 50 years.

Higher interest rates triggered considerable portfolio outflows from emerging markets. As advanced economies raised interest rates, international investors shied away from the riskier assets of emerging markets, favouring the safer and higher quality assets offered by advanced economies. With 90% of central banks raising interest rates by the end of 2022, emerging market assets experienced portfolio outflows totalling $49 billion in 2022, which was higher than the $36 billion outflows seen during the first year of the COVID-19 pandemic in 2020 (Figure 1). Portfolio inflows resumed in 2023, and although net portfolio inflows were almost stagnating year-to-date by the third quarter of 2023, the year closed with net inflows of $39 billion, backed by more accommodative monetary policies by central banks. However, net portfolio inflows in 2023 were half of those recorded in 2019, the year before the COVID-19 pandemic erupted. In 2024, the US Federal Reserve maintained its monetary policy tightening bias to support the US dollar, dragging inflows to emerging markets.

Figure 1

Year-to-date portfolio flows to emerging markets (Y-axis: $ billion; X-axis: Days passed since the beginning of the year)

Source: Institute of International Finance and EIB staff calculations.

In response to monetary policy tightening, returns on African stocks declined more compared with those of emerging markets and developing economies. Higher interest drove lower stock prices globally, but the decline was more pronounced in Africa relative to emerging markets and developing economies. The authors of this chapter proxy the African stock market indices using the Standard and Poor’s Pan Africa Benchmark Market Index (Bloomberg ticker: STEIPADP Index), which is a comprehensive benchmark including stocks from 12 African emerging and frontier markets.[2] We proxy stock prices in emerging markets and developing economies using the MSCI Emerging Markets Investable Market Index (Bloomberg ticker: MXEF Index), which captures large-, mid- and small-cap representation across 24 emerging markets. All stock market indices used are US dollar based. Pan Africa’s total returns (net of dividends) started declining at the onset of the interest rate hiking cycle in 2021 until mid-2022, oscillating around zero thereafter (Figure 2). The drop in returns was more pronounced for Pan African stocks than for those of emerging markets and developing economies, reflecting the greater risk aversion of global investors to Africa. The returns for Pan Africa remained negative for most of the policy rate hiking cycle, whereas returns for emerging markets and developing economies were mostly positive during this period.

Utility and energy sectors outperformed the stock market in Africa.Figure 3 depicts the returns by sector and shows that the energy and utilities sectors followed by the materials sector performed better than the overall market. The materials sector had the third highest excess returns, relative to the market, in the Pan Africa and Africa Frontier stock market indices. These excess returns most likely stem from the marked increase in international commodity prices, including oil and construction material prices, recorded at the same time. For the other sectors, excess returns were either stagnant or negative.

Figure 2

Cumulative total return (net dividends) in emerging markets and developing economies and in Africa

Source: Bloomberg and EIB staff calculations.

Figure 3

Return indices of African stocks by industry minus pan-Africa (percentage points)

Source:Refinitiv and EIB staff calculations.

Note:>0: The return of the specific industry stock index outperforms that of the overall market.

<0: The return of the specific industry stock index underperforms that of the overall market.

Falling stock prices were also reflected in the fall in market capitalisation. Stock prices declined initially in 2020 due to the outbreak of COVID-19 but rebounded in 2021 as markets were buoyed through central bank support. However, when inflation became a problem, central banks reversed course and tightened monetary policy, leading to a fresh decline in stocks. The market capitalisation of the stock price indices fell across the board from the start of the policy rate hiking cycle in 2021. Although this market capitalisation has been improving in emerging markets and developing economies since mid-2022, it is still falling in Pan Africa (Figure 4a). Currently, stock market capitalisation is highest in emerging markets and developing economies ($19.3 trillion), overshadowing that in Pan Africa ($437 billion). While Figure 4a shows that stock market capitalisation in Africa and emerging markets and developing economies followed the same trend in the two years after the pandemic, total returns experienced diverging trends during the same period (Figure 2), and this difference in behaviour is explained by the inclusion of dividends in total returns. By African region, stock market capitalisation as a percentage of GDP is falling across all regions except North Africa (Figure 4b), where it increased marginally in 2023 compared to the previous year. Southern Africa has the largest stock market capitalisation followed by North Africa, while stock market capitalisation in West Africa and East Africa are similar.

Figure 4

Stock market capitalisation

Source:Bloomberg and EIB staff calculations.

Note:Country aggregations: Central Africa: Cameroon; Central African Republic; Chad; Democratic Republic of the Congo; Equatorial Guinea; Gabon; Congo; and São Tomé and Príncipe; East Africa: Burundi; Djibouti; Ethiopia; Kenya; Rwanda; Tanzania; and Uganda; North Africa: Algeria; Egypt; Morocco; and Tunisia; Southern Africa: Angola; Botswana; Comoros; Eswatini; Lesotho; Madagascar; Malawi; Mauritius; Mozambique; Namibia; Seychelles; South Africa; Zambia; and Zimbabwe; West Africa: Benin; Burkina Faso; Cabo Verde; Côte d’Ivoire; Ghana; Guinea; Guinea-Bissau; Liberia; Mali; Mauritania; Niger; Nigeria; Senegal; Sierra Leone; The Gambia; and Togo.

Bond markets

Africa’s indebtedness has increased significantly in the last decade.