What you need to know:
The Absa Africa Financial Markets Index 2022 has revealed that Uganda has risen two places upwards to fourth in Africa out of the 26 countries surveyed by the Official Monetary and Financial Institutions Forum (OMFIF). In an interview with Prosper Magazine’s Martin Luther Oketch, Mr David Wandera, the executive director and head of markets at Absa Bank Uganda explains what this score means for Uganda’s economy. Excerpts….
What is the Absa Africa Financial Markets Index and why is it relevant to the Ugandan economy?
The Absa Africa Financial Markets Index is a score used to measure Africa’s economies or markets in terms of market accessibility, openness and transparency.
The index aims at showing how various economies and markets can reduce barriers to investment which can, in turn, boost sustainable growth.
Over the last six years, the index has been recognised as a benchmark for the investment community to assess and access information about the various economies, how easy it is to get into those economies, how to earn returns from those economies and the market infrastructure. The index is a benchmark for policymakers across the continent.
How did Uganda perform in the 2022 index compared to the previous year?
The latest AFMI has been the best so far for Uganda. It improved by 6 points and moved to 4th position out of 26 countries measured. This is the first time Uganda has entered the top 4 countries and the first time for any East African country.
The pillars or measures of the index are six, namely: Market depth; Access to foreign exchange; Market transparency, tax and regulatory environment; Capacity of local investors; Macroeconomic opportunity and; Legality and enforceability of financial markets master agreements.
What drove this performance?
Two indicators primarily drove Uganda’s growth; access to foreign exchange which is a depiction of our foreign exchange market, like the size of the foreign exchange market, the number of products available and the liquidity in the foreign exchange market.
The second indicator where Uganda greatly performed was Market transparency, which was driven by the increased access to foreign exchange, which increased market liquidity for foreign exchange and volumes.
A quick look at Uganda’s foreign exchange market showed a growth in the total amount of transactions done from $24.5 Billion to $29 billion in 2022, which was significant growth for Uganda, especially since the country had just recovered from Covid-19 and with the onset of Ebola.
Uganda also performed very well with the ESG initiatives. This is under the Market transparency pillar, and the Bank of Uganda launched a five-year strategic plan from 2022 to 2027, which includes different measures to cover climate risk and sustainable finance. This was one of the initiatives that caused Uganda’s performance to improve significantly.
What can be done by both the government and private sector to further improve the performance of the country’s financial markets?
There is already work to create or make Uganda a netting destination, which allows money to flow quickly in transactions. With that, we shall be able to improve on three indicators, market depth and capacity of local investors, which is interlinked with the legality and enforceability of financial markets master agreements.
The size of our bond, swap and forex markets are smaller, and this needs just a change in legislation to significantly move upwards so that investors are confident that there will be fewer barriers in transactions.
The Capacity of local investors needs to be improved by increasing the number of active savers in our pension fund. While Uganda has the largest pension fund in the region, the number of saving per capita for Uganda is $123 per person compared to the index average for 26 countries which is about $826. The current number of savers is about 700,000 for formally employed people, this needs more than 100% increase to almost two million savers.
Uganda and most of East Africa struggled with the pillar of Capacity of local investors and Market depth, primarily the bond market. This is because there is no product diversity regarding the number of products traded in Uganda and no green bonds or infrastructure in other countries.
Areas to improve
Despite slight improvements to Uganda’s score in Pillar 1: Market depth, corporate bond turnover and total equity turnover remained low in 2022.
Uganda continues to have a relatively low stock market capitalisation, which fell by 1.5 percentage points as a share of gross domestic product in the 12 months to June 2022. Despite the latest ESG incentives and standards, Mr Wandera pointed out that there is limited availability of ESG products (such as green bonds) on the domestic market.