By: Heidi Barends - Head of Sustainable Finance, Absa CIB and Motlatsi Mthimunye, Head Investment Banking Division SA, Absa CIB

Some may say this is an understatement, but we are experiencing a year of significant economic uncertainty. The less certainty, the greater the financial instability, and as the International Monetary Fund so succinctly explained last year, unknowns raise the risk of financial market volatility alongside a sharp decline in economic growth.

With unpredictable macroeconomic conditions due to an escalating global trade war, potential trade disruptions (alongside overall economic uncertainty) could impact investment flows across Africa. In turn, this could lead to a significant increase in the cost of capital in international markets for local companies.

Therefore, many governments – and finance institutions – are going to have to be more strategic in their growth strategies if they want to weather this storm. Capital markets are considered one of the foremost strategic tools of economic growth, channelling funding between suppliers and those who need it most – governments, businesses, and individuals.

There are numerous studies which show the strong correlation between the depth and sophistication of a country’s capital markets and its ability to grow. The African Development Bank, in its most recent 10-year strategy, highlights “limited access to affordable credit and underdeveloped capital markets” as one of the constraints holding back Africa’s industrial development.

It is essential that the financial sector works together with government to accelerate capital market funding because the benefits of a transparent and liquid domestic capital market are myriad. By issuing debt, for example, capital markets can give flexibility to growing businesses that invest in productive activities and drive future growth. This, in turn, leads to greater productivity and, of course, a better contribution to the economy.

Similarly, sophisticated capital markets offer a wide variety of financial instruments to help investors diversify their risk and manage their portfolios more effectively. They also drive liquidity, facilitating capital raising that attracts increased participation from both domestic and foreign investors. Such funding is also vital to spurring innovation and entrepreneurship, as capital markets enable corporates and entrepreneurs to actively seek and secure funding for forward-thinking projects.

According to the United Nations Economic Commission for Africa, local currency funding (or local currency bond markets) are integral to the development of broader capital markets. This allows risk to be priced appropriately and enables investors to better facilitate monetary policy transmission. Local currency financing and capital market development could, the UN says, significantly mitigate the impact of financial crises on the domestic economy, while also facilitating capital flow absorption.  

In simple terms, when the local currency is neglected, the human impact becomes tangible. In Kenya, the price of electricity is adjusted by Kenya Power and Lighting Company (KPLC), the country's electricity distribution company, based on fuel price and foreign currency fluctuations. This is due to KPLC having to raise funding in hard currency to support the development of projects. What does this practically mean? Global uncertainty, geo-politics, and exogenous decisions determine if some Kenyans can afford electricity. If hard currency funding were to be replaced with local currency funding, it would significantly insulate Kenyans from these shocks.  

Contrast this to the South African Capital Market: from presidential elections to global conflicts, the South African domestic bond markets have remained robust and resilient. Supply and demand dynamics in the Debt Capital Markets continue to deliver competitive pricing for borrowers and a credit-diverse set of fixed income assets to investors amidst global shocks. This means that South African borrowers have continued to be able to raise debt, efficiently and quickly, regardless of the events playing out on the global stage.

From an Equity Capital Markets perspective, the tide has slowly turned, and positive sentiment has returned to the market, particularly since the formation of the Government of National Unity last year. We’ve seen an easing rate cycle, improved logistics backlogs, and mostly stable energy infrastructure. On the back of this, as well as the anticipated recovery in GDP (gross domestic product) growth, there has been increased foreign funding flowing into the country and a renewed focus on the domestic Equity Capital Markets. This is evidenced by the increase in issuance activity in the form of primary capital raises, monetisation, and Initial Public Offerings (IPOs).

In the last year, Absa has executed landmark transactions on the continent in both debt and equity capital markets, from issuing the first Sustainable Bond in Botswana, opening the newly established Protea Bond market for foreign sovereigns issuing on the Johannesburg Stock Exchange (JSE), to establishing the first sustainability-linked issuance in the packaging and paper industry in South Africa.

On the IPO front, we acted on the largest IPO in Africa last year through the multi-oversubscribed offering and listing of a discount retailer on the Main Board of the JSE. This, alongside listing the first telecommunications company on the Stock Exchange of Mauritius, the largest ever IPO in the history of the Mauritian bourse. We also underwrote a successful and oversubscribed Rights Issue as part of a uniquely structured two-step recapitalisation plan for a listed retail client, underpinning its turnaround strategy and unlocking value for its shareholders.

We can see that deep and liquid capital markets, supported by local investors, enable corporates, state-owned companies and sub-national entities to maintain their independence in decision making that ultimately supports their respective sustainable development agenda. But how can businesses, and financial institutions, support the evolution of these markets?

Absa’s focus remains on developing economies and deepening capital markets on the continent by supporting product development, issuance activity, and investor mandates. This, while working and in hand with regulators on improving access and transparency in domestic capital markets. As a pan-African bank, we remain committed to advancing capital market development across the continent through innovative financial solutions. In times of uncertainty, the collaboration between governments, corporates, and financial institutions will be central to shaping a future where capital markets serve as a catalyst for economic resilience and prosperity.