DANISH DEVELOPMENT DAYS
KEY NOTE ADDRESS OF VICE PRESIDENT MME ZEINAB EL BAKRI
DEVELOPING AFRICAN FINANCIAL MARKETS: WHO SHOULD DO IT AND
HOW? th8 June 2009
1. Prior to July 2008, we were talking of a continent making a historical turn and being propelled to a high growth path. It took decades of painful reforms to build the foundations for high growth. But it has taken only a few months to see Africa’s growth cut by half.
2. It is clear that a substantial slowdown in progress toward the MDGs will likely result from the economic and financial crisis. As the crisis continues to unfold, increasing income poverty and lower government revenue will also lead to lower public and private spending on social services, affecting all of the MDGs. Moreover, African countries will need to quickly put in place conducive policy and governance reforms to support domestic growth drivers, tailored to each country’s circumstances, to support the promotion of local industries as well as other export oriented activities. Today, the world economy is officially in stagnation, industrialized countries are in recession and Africa faces uncertainties over its growth and development prospects.
3. The current economic crisis affects all the drivers of African growth: prices and demand for primary commodities, capital flows, especially foreign direct investment. Many countries face the risk of twin deficits Ms. Zeinab Bashir EL BAKRI 1
namely, current account and budget deficits. Countries which have accumulated reserves from positive commodity revenues, and which were generally considered to be highly performing economies, such as Botswana, are now facing severe budgetary deficits which need to be managed prudently. This means that increasingly focused efforts will be needed to continue on a path of sustainable economic growth to reach the Millennium Development Goals while ensuring that the financial governance gains made in the past in Africa are not lost. One of the main impact of the African financial markets dependency is the reduced financial inflows to the continent which have further contributed to the economic slow-down and led to greater risk-averse behaviour amongst the regional and local banking institutions. This is expected to directly impact financing for development. As such a clear indication is that there must be a continued effort to provide the conducive environment to increase investments especially in infrastructure development as well as employment generation programmes whether in the public or private sectors.
4. There is an urgent need to ensure that investment in country and regional infrastructure development across the continent is not endangered. It is critically important that African countries keep an adequate level of infrastructure investment to support private sector activity in general and enhance competitiveness and diversification in particular. In the wake of the on-going financial crisis the role of the private sector in development has become even more clear. However, private sector activities are deeply demand oriented and will only prevail in a conducive environment which many African countries continue to lack. Also, as a result of the economic Ms. Zeinab Bashir EL BAKRI 2
slow-down, the crisis is likely to result in a contraction of labour demand. Higher unemployment and underemployment rates may persist for some time.
5. Remittance flows are another factor at risk because of further reductions in job security for migrant workers. This creates a greater burden on the home country to provide employment for migrant workers who tend to lose their jobs more quickly than other workers as a consequence of national policies or public pressures. As a result, migrant workers’ home countries may be deprived, through reduced remittances, of the resources needed to cushion the impact of the crisis and may be forced to create additional employment opportunities.
6. The challenge facing African countries is how, with fewer resources (due to potentially reduced aid and remittances), they can pursue policies that will protect or expand critical expenditures, including on social safety nets, human development and important infrastructure. There is, therefore, a strong need to expand assistance to low-income African countries to protect such critical expenditures and prevent an erosion of progress towards increasing economic growth and reducing poverty. However, it will also be necessary for African countries to increasingly rely on their own resources. We believe that strong financial markets could be one such source. Specifically, domestic bond markets can help to diversify a country's financial sector and expand risk management tools for borrowers and investors. alike. Financial sector development is paramount to successful and sustainable economic development. Indeed a more effective formal financial Ms. Zeinab Bashir EL BAKRI 3
system will contribute significantly to a better allocation of resources for investments while an improved access to financial services for the poor and the rural population will help alleviate poverty.
7. Allow me now to go over some of the main characteristics of African financial markets:
; It must be recognised that African financial markets are at varying
levels of development. In fact, strictly speaking, no bond markets
exist outside of the WAEMU zone.
; Second, they tend to focus more on primary rather than secondary
; Thirdly, African local financial markets suffer from weak local
; Fourthly, African financial markets are exposed to weak regulatory
and legal frameworks.
; Fifthly Roles and responsibilities of the various actors in the financial
markets are not well defined. These actors include, the government,
market infrastructure providers and market participants. Ms. Zeinab Bashir EL BAKRI 4
; Last but not least, it is clear that debt in the public sector dominates.
8. Clearly these weaknesses will require a concerted response which must include some of the following elements:
; One, building the capacity of market infrastructure providers
including credit rating agencies, trading, clearing and settlement
; Advising governments on creating an enabling policy, legal and
regulatory environment in addition to training government regulators
on how to oversee the market places.
; Building capacity towards better financial data collection and
9. Allow me to now talk about one initiative spearheaded by the African Development Bank in partnership with others, which specifically aims at developing African capital markets.
10. As part of the Bank’s strategy to strengthen the financial sector in African economies, the Bank has just launched the “African Financial Ms. Zeinab Bashir EL BAKRI 5
Market Initiative” (AFMI) which is targeted to further the development of domestic African capital markets.
11. The objectives of the AFMI are multiple:
; To contribute to the development of local currency debt markets in
; To reduce African countries dependency on foreign currency
; To help enlarge the investor base in African Domestic debt Markets
; To improve availability and transparency of African Fixed Income
Markets related Data
; To provide alternative sources of long term funding for borrowers in
; To create a permanent forum for discussion and provision of technical
assistance on domestic bond market issues
12. The African Financial Market Initiative (AFMI) will put in place two building blocks for a long-term relationship between financial market stakeholders in Africa. It will also contribute to the setting up of a transparent and well-documented statistical environment for the financial markets. This will attract investors both domestic and foreign to the investments in financial markets. It will eventually improve financial market access for corporate borrowers and contribute to the creation of investment vehicles accessible to retail investors. It will also contribute to improve African countries’ borrowing terms in local currency, reducing their
dependency on hard currency.
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13. The AFMI will be led initially by the AFDB, however for it to be a success in the long run there will be a need for strong commitment from all stakeholders. The AfDB feels strongly that an initiative led by the users and piloted by all stakeholders will be beneficial to the continent as a whole. The deliverables of the AFMI are of different types and will ultimately enable to create an environment more conducive to business development and investment in domestic financial markets.
14. This initiative will put in place the building blocks for a long-term relationship between financial market stakeholders in Africa. It will also contribute to the setting up of a transparent and well-documented statistical environment for the domestic financial markets, which in turn, will attract investors both domestic and foreign to the financial markets. Countries will learn from each other through the exchange of experiences and this will favour financial integration and harmonization. It will eventually improve financial market access for corporate borrowers and contribute to the creation of investment vehicles accessible to retail investors. 15. Activities and deliverables related to each of the AFMI's building blocks:
16. African Financial Markets Database (AFMD): Selection of Relevant Indicators for the AFMD, including:
; Capital Markets Indicators
; Macro and Microeconomic Indicators including Public Foreign and
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; Domestic Bond Markets Indicators including all the necessary
information for building an African Bond Index
; Regulation and tax treatment
17. African Domestic Bond Fund (ADBF): The ADBF will be invested in African Local Currency denominated sovereign bonds and it will be initially funded by the AfDB and African Central Banks. The specific objectives of this instrument are the following:
; Reduce African countries dependency on foreign currency
; Encourage the deepening of domestic bond markets through
investments in longer dated assets
; Contribute to enlarge the investor base in African Domestic Bond
18. The complete implementation of the AFMI is expected to span over several years driven by the time needed to put in place the database, the reforms and improvements as defined by the Working Groups and finally the creation of indices and tracker funds to complement the creation of the ADBF. After that, it is expected that the dedicated working groups will keep working on delivering solutions and improvements to enable the AFMI structure meet future challenges and innovations.
19. Finally let me conclude by reiterating the following messages:
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; While it is true that the current financial crisis threatens to erode
previous gains, strengthening African financial markets and
institutions presents an opportunity that can ensure growth, thus
protecting economies in the current environment from the dangers of
reduced external financial flows..
; Well governed financial markets, can help convince investors of the
long term stability of their investments.
; Achieving such well governed markets should therefore be the main
aim of government policies in partnership with the private sector.
; This will require strong political will and leadership in addition of
course to, technical assistance as well as strong support to specific
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