Finance policy
The rise of Africa's "frontier markets"
Africa's emerging markets
Authors:
D.C.L. Nellor
Publisher:
Finance and Development, IMF, 2008
This article discusses African countries and the second generation of “emerging market” countries. It likens attraction from institutional investors to Africa to that in emerging markets in the 1980s. However, markets are more integrated today and investors are immersed in a wide range of financial activities and using complex technologies. Africa faces challenges which it’s predecessors have had 25 years to adapt to.
The term emerging markets is used to identify countries in sub-Saharan Africa that have financial markets and attract investor interest. The following are found to encourage emerging market status:
- group takeoff in growth
- growth led by the private sector
- public policy embracing market-led growth
- financial markets in which to invest
Emerging markets are attractive to investors because they offer high rates of return relative to mature markets. They also offer opportunity for investors to diversify risk. The article looks at ways to determine a countries growth prospects. Assessment differs depending on whether a country is resource-rich or resource-scarce.
Successful emerging markets feature the private sector as the engine of growth. Investors want to see that public policy supports private sector development and property rights protection. Some African countries are following first-generation emerging markets by using policy actions to establish them as emerging markets, for example Mozambique.
Africa is also encouraging institutional investment to its equity markets. From 2005 to 2007 African equity market capitalisation went from 20 percent to 60 percent of GDP. Trading in Africa’s debt markets reached £12 billion over 2006-07.
The rise of some African countries to emerging market status gives them great economic opportunity. To ensure sustained growth from increased investment and financial activity the author recommends:
- macroeconomic policy and capital account prudential policies should be tailored to avoid the traps of volatile short-term flows
- supervision should promote financial sector stability and effective intermediation
