Emerging Markets of Africa
Today, several African countries, with developing financial markets are considered promising candidates to become part of a second generation of “emerging market” countries, writes David C. L. Nellor, a senior advisor in the International Monetary Fund’s African department in September 2008 issue of the Finance & Development magazine, a quarterly publication of the IMF.
“Emerging market”, a term coined by the International Finance Corporation in 1980, refers to developing countries with stock markets that were beginning to demonstrate the features of the mature stock markets in industrial countries. In Africa, only South Africa so far has received the “emerging market” status. But after 2000, the term emerging market was replaced by “frontier markets” to describe countries with markets that are smaller and less liquid than those in the more advanced emerging markets. Many of the emerging markets in the 1980s might have been called frontier markets under today’s classification.
Some crucial developments that are taking place in parts of the African continent today resemble the developments that took place before the arrival of institutional financial investors in emerging markets in the 1980s, including economic growth, the emergence of the private as the key driver of that growth, and the opening up of the financial markets. Nellor also argues that the global environment has played a key role in African development as financial markets gradually became more sophisticated and complex over the past 25 years around the globe, subsequently financial technology is transferred to African emerging markets almost at the same time as it is developed in mature and sophisticated markets. However, its application was inhibited by the lack of market depth and infrastructure in the case of Africa (Nellor, 30).
Thus, there are many challenges facing African nations in the years ahead. One prominent challenge will be to maintain financial sector stability. The most important institutions that will bear the burden are Africa’s central banks. With most of the financial flows intermediated through domestic banking systems, central banks need to invest in their supervisory capacity to manage the sophisticated financial activity that has emerged almost overnight. “At the same time, policymakers have less scope to manage these activities. For instance, prudential based approaches to manage capital flows, such as taxes on short-term flows, can be bypassed more easily because of the availability of derivative transactions that were not used in emerging markets a generation ago,” argues Nellor (30).
As stated above, there are many reasons why Africa’s frontier markets are very attractive to investors. For one, private sector led growth ranks the highest in the list. Private sector is promoted as the engine of growth in emerging market nations, and investors want to have some sort of guarantee from the policymakers that policies will continue to support private sector development and that private property rights will be protected (32).
Today, the economic outlook is very promising in Africa. African equity market capitalization was about 20 percent of GDP in 2005, comparable to the level reached by ASEAN in the late 1980s. By 2007, Africa’s equity market capitalization had surged to over 60 percent of GDP. Africa’s domestic bond markets are attracting interest in a way not seen in first generation emerging markets.
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