Finance in Africa: Unlocking investment in an era of digital transformation and climate transition

Chapter 1

Financial markets and financing conditions

This opening chapter of the 2024 report provides an overview of financial markets and financing conditions in Africa. Stock markets, bond markets and private capital markets are examined at continent, regional and country levels. The second half of the chapter focuses on financing conditions in Africa, and describes the data obtained with an updated version of the financial conditions index for Africa, which was first introduced in last year’s report.

Like elsewhere in the world in 2023, African financial markets felt the effects of tightened global financial conditions, a growth slowdown, heightened inflation, exchange rate depreciation and declining foreign exchange reserves. However, African stocks faced a more pronounced decline compared with those of emerging markets and developing economies, reflecting the greater risk aversion of global investors to Africa. The tightening of interest rates resulted in lower stock valuations and prices in Africa, with total returns (net of dividends) declining at the onset of the interest rate hiking cycle in 2021 until mid-2022 and oscillating around zero in 2023. The fall in stock prices was mirrored by a decrease in market capitalisation as a percentage of gross domestic product (GDP) across most regions, except for North Africa, where it marginally increased compared with the previous year.

Government bond issuance stagnated as yields rose significantly for more risky sovereigns in 2022 and 2023. As developed economies tightened their monetary policies, international investors assumed a more risk-averse stance and shunned debt securities from more indebted government debt issuers, especially in Africa. Consequently, Eurobond issuances by African sovereigns stagnated in 2023, except for Egypt and Morocco. Moreover, as governments became more indebted, yields started rising to reflect increased sovereign risk, and the pressure on yields was compounded by higher inflation expectations. The increase in yields was most pronounced in North and West Africa, followed by East, Central and Southern Africa. Nevertheless, with the easing of global financial conditions in 2024, four countries (Benin, Côte d’Ivoire, Kenya and Senegal) successfully tapped the international bond market after a hiatus of approximately two years, indicating that investor confidence in African economies is growing but at elevated interest rates.

African private capital markets had a resilient but difficult year in 2023. A surge in private capital fundraising in Africa, to $3.7 billion in 2023 from $2.5 billion in 2022, meant fundraising eclipsed the record of $3.5 billion set in 2019. However, private capital investments fell by 24% to $5 billion in 2023 from $6.5 billion in 2022, making it the lowest amount of capital deployed since 2020. Among the asset classes, private equity ($1.24 billion) and venture capital ($1.14 billion) experienced annual declines of 39% and 59%, respectively, relative to 2022. Private credit fell by 70% to $0.33 billion in 2023, while there was a sharp increase in infrastructure spending, which almost quadrupled from $0.55 billion in 2022 to $2.18 billion in 2023. Private capital investment has become more concentrated at the country level, with South Africa leading and accounting for half of all African investment in 2023 (20%), followed by Kenya (11%), Côte d’Ivoire (7%) and Morocco (6%). The renewables sector accounted for the largest share at 37% of investment, surpassing financial services, which had dominated in the previous year.

Financial integration increased across most African regions until the shocks caused by the COVID-19 pandemic and Russia’s invasion of Ukraine stalled or even reversed the growth. From the latest available data for 2022, financial integration ranged from 84% of GDP in West Africa to 362% in Southern Africa, with values between 104% and 116% for the other African regions. In this 2024 edition of the Finance in Africa report, the sample for calculating the financial conditions index in Africa has been expanded to ten countries from the four employed in 2023,[1] further enhancing the representativeness of the index. The financial conditions index reveals a severe tightening in financial conditions over the course of 2023, as in 2022, and this tightening is driven by policy rate increases, exchange rate depreciation and the fall in stock markets. The pressure exerted by these factors started decreasing around mid-2023, particularly for the stock market, but weaker private sector credit growth and wider lending spreads maintained tightening pressures.

African governments faced increasing financing needs as international investor appetite declined, strengthening the connection between governments and banks and increasing crowding-out effects (when banks channel their financial resources to sovereign instruments at the cost of limiting lending to the private sector). African bank holdings of domestic sovereign debt have increased sharply (to 17.5% in 2023 from 10.3% in 2010), raising the potential for bank losses in the event of a debt default or restructuring. At the same time, there is a decreasing trend in banks’ private sector lending (to 38% in 2023 from 42% in 2010), posing concerns about the severity of crowding out. The severity of crowding out index reveals that before easing in 2024, crowding out significantly tightened to record levels in 2023, driven by higher public debt issuance and a rebound in private credit demand which created intense competition for banks’ funding. Furthermore, the severity of crowding out was particularly high in 2023 in over half of the African countries examined, and regionally the highest levels of crowding out were seen in East, Southern and West Africa.

Financial markets in Africa

Stock markets

The tightening of monetary policy following the COVID-19 pandemic was the most synchronised in the past half a century. Higher inflation triggered by the COVID-19 pandemic and Russia’s invasion of Ukraine was more persistent than initially expected. Higher prices that were at first limited to commodities such as food and energy spread to inflation and became more engrained and highly correlated globally. On the African continent, inflation increased to 13% in 2022 and 19.3% in 2023 from 9% in 2019, with the most pronounced increase in West Africa (to 17.1% in 2022 and 20.4% in 2023 from 8.2% in 2019). The ensuing global monetary tightening was the most synchronised in the past 50 years.

Higher interest rates triggered considerable portfolio outflows from emerging markets. As advanced economies raised interest rates, international investors shied away from the riskier assets of emerging markets, favouring the safer and higher quality assets offered by advanced economies. With 90% of central banks raising interest rates by the end of 2022, emerging market assets experienced portfolio outflows totalling $49 billion in 2022, which was higher than the $36 billion outflows seen during the first year of the COVID-19 pandemic in 2020 (Figure 1). Portfolio inflows resumed in 2023, and although net portfolio inflows were almost stagnating year-to-date by the third quarter of 2023, the year closed with net inflows of $39 billion, backed by more accommodative monetary policies by central banks. However, net portfolio inflows in 2023 were half of those recorded in 2019, the year before the COVID-19 pandemic erupted. In 2024, the US Federal Reserve maintained its monetary policy tightening bias to support the US dollar, dragging inflows to emerging markets.

Figure 1

Year-to-date portfolio flows to emerging markets (Y-axis: $ billion; X-axis: Days passed since the beginning of the year)

Source: Institute of International Finance and EIB staff calculations.

In response to monetary policy tightening, returns on African stocks declined more compared with those of emerging markets and developing economies. Higher interest drove lower stock prices globally, but the decline was more pronounced in Africa relative to emerging markets and developing economies. The authors of this chapter proxy the African stock market indices using the Standard and Poor’s Pan Africa Benchmark Market Index (Bloomberg ticker: STEIPADP Index), which is a comprehensive benchmark including stocks from 12 African emerging and frontier markets.[2] We proxy stock prices in emerging markets and developing economies using the MSCI Emerging Markets Investable Market Index (Bloomberg ticker: MXEF Index), which captures large-, mid- and small-cap representation across 24 emerging markets. All stock market indices used are US dollar based. Pan Africa’s total returns (net of dividends) started declining at the onset of the interest rate hiking cycle in 2021 until mid-2022, oscillating around zero thereafter (Figure 2). The drop in returns was more pronounced for Pan African stocks than for those of emerging markets and developing economies, reflecting the greater risk aversion of global investors to Africa. The returns for Pan Africa remained negative for most of the policy rate hiking cycle, whereas returns for emerging markets and developing economies were mostly positive during this period.

Utility and energy sectors outperformed the stock market in Africa. Figure 3 depicts the returns by sector and shows that the energy and utilities sectors followed by the materials sector performed better than the overall market. The materials sector had the third highest excess returns, relative to the market, in the Pan Africa and Africa Frontier stock market indices. These excess returns most likely stem from the marked increase in international commodity prices, including oil and construction material prices, recorded at the same time. For the other sectors, excess returns were either stagnant or negative.

Figure 2

Cumulative total return (net dividends) in emerging markets and developing economies and in Africa

Source: Bloomberg and EIB staff calculations.

Figure 3

Return indices of African stocks by industry minus pan-Africa (percentage points)

Source: Refinitiv and EIB staff calculations.

Note: >0: The return of the specific industry stock index outperforms that of the overall market.

<0: The return of the specific industry stock index underperforms that of the overall market.

Falling stock prices were also reflected in the fall in market capitalisation. Stock prices declined initially in 2020 due to the outbreak of COVID-19 but rebounded in 2021 as markets were buoyed through central bank support. However, when inflation became a problem, central banks reversed course and tightened monetary policy, leading to a fresh decline in stocks. The market capitalisation of the stock price indices fell across the board from the start of the policy rate hiking cycle in 2021. Although this market capitalisation has been improving in emerging markets and developing economies since mid-2022, it is still falling in Pan Africa (Figure 4a). Currently, stock market capitalisation is highest in emerging markets and developing economies ($19.3 trillion), overshadowing that in Pan Africa ($437 billion). While Figure 4a shows that stock market capitalisation in Africa and emerging markets and developing economies followed the same trend in the two years after the pandemic, total returns experienced diverging trends during the same period (Figure 2), and this difference in behaviour is explained by the inclusion of dividends in total returns. By African region, stock market capitalisation as a percentage of GDP is falling across all regions except North Africa (Figure 4b), where it increased marginally in 2023 compared to the previous year. Southern Africa has the largest stock market capitalisation followed by North Africa, while stock market capitalisation in West Africa and East Africa are similar.

Figure 4

Stock market capitalisation

Source: Bloomberg and EIB staff calculations.

Note: Country aggregations: Central Africa: Cameroon; Central African Republic; Chad; Democratic Republic of the Congo; Equatorial Guinea; Gabon; Congo; and São Tomé and Príncipe; East Africa: Burundi; Djibouti; Ethiopia; Kenya; Rwanda; Tanzania; and Uganda; North Africa: Algeria; Egypt; Morocco; and Tunisia; Southern Africa: Angola; Botswana; Comoros; Eswatini; Lesotho; Madagascar; Malawi; Mauritius; Mozambique; Namibia; Seychelles; South Africa; Zambia; and Zimbabwe; West Africa: Benin; Burkina Faso; Cabo Verde; Côte d’Ivoire; Ghana; Guinea; Guinea-Bissau; Liberia; Mali; Mauritania; Niger; Nigeria; Senegal; Sierra Leone; The Gambia; and Togo.

Bond markets

Africa’s indebtedness has increased significantly in the last decade. The mix of ample liquidity available after the 2008 global financial crisis and governments’ resorting to bilateral and market-based lending fuelled indebtedness in sub-Saharan Africa. The upward trend in indebtedness steepened as governments had to incur considerable fiscal spending to support economic activity and the health system during the COVID-19 pandemic. According to the World Bank (2023), the stock of sub-Saharan Africa’s (sub-Saharan Africa excluding high-income countries in the region) external debt more than doubled to $833 billion in 2022 from $340 billion in 2010 (+145%), and a similar trend was observed in North Africa, with an increase to $275 billion from $105 billion (+162%) over the same period. For comparison, the stock of debt in emerging markets and developing economies (low- and middle-income economies) increased from $4.3 trillion in 2010 to $9 trillion in 2022 (+107%).

Yields increased to a greater extent for more risky sovereign bonds in 2022 and 2023. As governments became more indebted, yields began to rise, reflecting increased sovereign risk, and the pressure on yields was compounded by higher inflation expectations. Governments issuing US dollar bonds in 2023 faced greater yields than those seen before the COVID-19 pandemic (Figure 5). Yields on US dollar sovereign debt in Africa increased to an even greater extent, leading to wider spreads relative to the bonds of emerging markets and developing economies. This rising cost of debt has contributed to fiscal problems. In nominal terms, interest payments on long-term external debt stock by emerging markets and developing economies have doubled since 2010 to an all-time high of $210 billion in 2022. In sub-Saharan Africa interest payments multiplied to $20 billion in 2022 from $4 billion in 2010. By African region, the increase in yields was most pronounced in North Africa and West Africa, followed by that in East Africa and Central Africa then Southern Africa. Despite a reduction in yields from late 2023 to mid-2024, they remain above pre-pandemic levels, meaning debt service costs will continue rising for African governments. For example, in sub-Saharan Africa, spending on government debt interest is expected to exceed 14% of fiscal revenues in 2024 to 2025, up from 13% in 2023 and 6% in 2014, signalling large liquidity needs (Fitch Ratings,