WASHINGTON, Aug 19 (Xinhua): Several African countries, with developing financial markets likely to attract institutional financial investors, are promising to become part of a second generation of "emerging market" countries, according to an IMF analysis.
According to the analysis to be published in the quarterly magazine of Finance and Development by the International Monetary Fund (IMF) in September, the same crucial development that presaged the arrival of institutional financial investors in emerging markets in the 1980s are taking place in parts of sub-Saharan Africa today, except South Africa which has been seen as an emerging market.
The article said that growth is taking off in Africa, the private sector is the key driver of that growth, and financial markets are opening up. The global environment has played a key role. The search for yield, triggered by significant global financial market liquidity, has encouraged investors to expand their horizons.
The article written by David CL Nellor said, however, the new generation faces a more complex, more integrated global environment than emerging markets of a quarter century ago.
Then, institutional investors accessed emerging economies largely through equity markets and, in some cases, foreign currency debt issues. It said today, these investments are but a part of the picture. Investors are immersed in a wide range of financial activities, including domestic bond and foreign exchange market instruments. Financial technology is more complex too.
Financial markets gradually became more sophisticated and complex over the past 25 years. Today, however, financial technology is transferred to African emerging markets more or less simultaneously as it is developed in sophisticated markets, although lack of market depth and infrastructure does inhibit its application.
That means that the second-generation emerging markets in Africa face significant immediate challenges to which their predecessors could adapt over a quarter century.
For one, maintaining financial sector stability will be challenging. With most of the financial flows intermediated through domestic banking systems, central banks in African countries have to strengthen considerably their supervisory capacity to manage the sophisticated financial activity that has emerged almost overnight. At the same time, policy makers have less scope to manage these activities.
The article said only recently have Africa's financial markets attracted significant interest from institutional investors. Just as first-generation emerging markets welcomed institutional investors to their equity markets, African countries are doing so now.
African equity market capitalisation was about 20 per cent of the GDP in 2005, comparable to the level reached by the Association of Southeast Asian Nations (ASEAN) in the late 1980s. By 2007, Africa's equity market capitalisation had surged to over 60 per cent of the GDP.
Africa's domestic bond markets are attracting interest in a way not seen in first- generation emerging markets. Trading of domestic and foreign debt in the international markets has accelerated rapidly.
Nigeria, as the largest country in this group, dominates the trade. During 200506, Nigeria received Paris Club debt relief and bought back much of the remainder of its external debt. Since then, trade in Nigerian debt has been mainly in domestic issues.
Nigerian debt trading ranked 21st globally at the end of 2007; this is equal to or exceeds many first-generation emerging markets. Using a variety of investment vehicles, Nigeria's banks raised about 12 billion US dollars in capital over 200607, much of it from offshore investors.
The criteria for an emerging market, growth, private sector-led growth, and investible markets, can be identified in eight sub-Saharan African countries that include Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia. Together these countries account for about 40 per cent of the region's population outside South Africa and almost one-half of its GDP.
It said the macroeconomic policy challenges for the African markets are similar to those faced by the ASEAN countries in the 1980s. African markets tend to use monetary aggregates as the basis for achieving inflation goals, supported by a managed float exchange rate policy.
