Kenya is now ranked third most attractive financial market in Africa after South Africa and Botswana, buoyed by stronger policies and a host of newly launched products, a new survey shows.
The country jumped two places from position five in 2017, according to Absa Africa Financial Markets Index 2018.
Only Kenya, Morocco and the Seychelles improved their scores most over the last year, particularly in terms of openness to foreign exchange, according to the report.
The report assesses progress and potential across six key areas: market depth; access to foreign exchange; market transparency, tax and regulatory environment; macroeconomic opportunity; and the legality and enforceability of standard financial markets master agreements.
Kenya scored the highest (93 out of 100 points) on “access to foreign exchange pillar,” beating South Africa to the top position in the report that was prepared by Absa Group and Official Monetary and Financial Institutions Forum (OMFIF).
“Kenya earns the highest marks in this pillar, a significant improvement from ranking sixth last year. The relaxation of capital controls boosted its performance, as did improvement of the country’s net portfolio flows to reserves ratio,” says the report.
It is followed by South Africa (91) Uganda (83), Botswana (79) and Zambia at 77 points in the pillar whose ranking looks at interbank market foreign exchange turnover, foreign exchange capital controls and frequency of official exchange rate reporting.
On the pillar legality and enforceability of standard financial markets master agreements, Kenya scores 83 points to rank third after South Africa (100 points) and Mauritius with 94 points.
Kenya is regarded among the top five markets with strong legal and enforcement frameworks that support financial agreements to provide attractive opportunities to international investors.
The index considered the extend by which markets follow Master Agreement of the International Swaps and Derivatives Association, the Global Master Repurchase Agreement and the Global Master Securities Lending Agreement.
In market transparency, tax and regulatory environment pillar Kenya scores 70 points to rank sixth. It is beaten by Nigeria, South Africa, Rwanda, Mauritius, Botswana, Ghana and Tanzania.
It looks at ability of countries to ensure regulations are not excessively burdensome, while maintaining financial stability and best practices.
“Countries do not always get the balance right, but those that do adjust their policies accordingly tend to fare well,” notes the report.
On macroeconomic opportunity that ranks markets based on their ability to support sustainable and inclusive growth, Kenya comes fifth but with a score of 65 points, same as Morocco. It is beaten by South Africa, Egypt, Namibia and Botswana.
This shows that Kenya struggles in ensuring that growth is inclusive and sustainable. It agrees with the recent assessment by Central Bank of Kenya governor Patrick Njoroge that without inclusive growth, the policy makers would have lost their way.
At position eight with 44 points, Kenya scores poorly on market depth, a metric that looked at the types of products in the market, total sovereign and corporate bonds, market capitalization and turnover of equites and bonds. This is a drop from last year’s fourth position of 49 points.
“Short-term treasury bills account for around 40 per cent of all local currency debt in Kenya. This makes it harder to build a broader market,” notes the report in part.
It adds that a multilateral financial institution operating in Kenya said that instead of issuance of a few large bonds in key maturities that could provide good reference points, the primary market consists of many small-sized bonds concentrated in the short end of the yield curve.
According to Absa Group CEO Maria Ramos, the report is crucial for policy makers to take stock of the progress made as well as mark areas that require improvement.
“We believe the index is an important tool that can be used by policy-makers and market participants to guide their efforts in building robust financial markets that can drive inclusive growth,” says Ms Ramos.