Keynote Address
by
Moses D Pelaelo
Governor, Bank of Botswana
November 9, 2018
I am delighted to be able to join you this morning to mark the
official launch in Botswana of the ABSA Africa Financial
Markets Index. It is even more of a pleasure to give the
keynote address in the wake of the news that, in the 2018
update of the Index, the rank of Botswana has moved from third
to second among the 20 countries covered in the Index.
Director of Ceremonies, I would like to preface my remarks by
narrative
observing that, not so long ago, the "Africa rising" was
somewhat eclipsed by what one respectable magazine
the "hopeless continent of
described as Africa", a label that was
later retracted as inaccurate and inappropriate. And rightly so!
The fact is that, despite a number of development challenges
and pockets of civil strife and political unrest in parts of the
continent, Africa has remained largely resilient. This is in the
context of an increasingly competitive and interconnected
global economy in which both developed and developing
countries continue to be challenged by relatively low rates of
economic growth, unsustainable levels of public debt, as well
as rising trade and socio-political tensions. It is all the more
impressive, therefore, that the broader trajectory in Africa is one
of progressive entrenchment of the democratic dispensation,
adherence to the rule of law, and sound economic reforms, with
laudable returns in some cases, in terms of overall economic
performance.
According to the 2018 World Investment Report by United
Nations Conference on Trade and Development (UNCTAD),
since 2010 FDI in Africa has averaged approximately USD 50
billion per annum. That the continent is increasingly regarded
as an attractive investment destination is itself part of the new
reality. But the on-going transformation of Africa is taking place
in a broader new global reality; that is, one of increased
economic interconnectedness in which there is a relative shift in
the centre of gravity of economic power towards emerging
markets. This shift brings with it increased opportunities for a
more equitable sharing of the benefits of global wealth and
income.
That said, investor interest in Africa remains unduly cautious
and heavily focussed on specific sectors, typically commodity-
related, in a few countries. The same UNCTAD report indicates
that, in 2017, FDI flows into Africa fell by 21 percent compared
to the previous year. Thus, there is a need to re-double efforts
to not only make investors aware of the myriad opportunities in
the continent of Africa but also provide tangible reassurance
that levels of idiosyncratic risk are no longer prohibitive.
To this end, as I speak, the inaugural African Investment Forum
organised by the African Development Bank has reached its
final day nearby in Johannesburg. The event has the explicit
aim of moving beyond talking about investment in Africa to
providing a setting for moving specific projects towards
bankable deals. It is also from this perspective that I welcome
the ABSA Africa Financial Markets Index, as a practical tool
that supports market development and, by extension, further
improvement in the investment environment. But, before
sharing some thoughts on the role of financial market indices,
let me, very briefly, enunciate the key characteristics of a well-
functioning financial sector.
Distinguished Guests, well-functioning financial markets should
foster savings mobilisation and investments in a cost-effective
manner, channelling surplus funds to their most productive
uses, hence contributing to economic growth. They should
inspire investor confidence; have breadth and depth in terms of
product offerings, as well as liquidity. But more importantly,
good governance and accountability structures, buttressed by a
sound regulatory framework, good accounting and auditing
standards, as well as efficient and independent judiciary are
essential to embed public trust and investor confidence.
In this way, developed financial markets facilitate the financial
interactions of households, corporations, financial institutions,
and governments. Such markets provide a pool of savings that
can be tapped into for funding investments by businesses and,
also, offer a stable source of funding for governments that can
be used to undertake infrastructure development. Furthermore,
empirical evidence suggests that countries with well-developed
financial markets gain significantly from increased FDI. Of
equal importance, studies concur that a developed financial
sector can also create opportunities for financial inclusion,
especially embracing SMMEs and the undeserved segments of
the population. In turn, this supports economic diversification,
enables economic agents to pool and offset risks, and
encourages savings and wealth creation, thereby contributing
to inclusive growth and improved living standards.
Various indicators or sets of indicators have been used to
measure financial development. The World Bank has
developed a comprehensive conceptual framework to capture
the multifaceted nature of the modern financial system. The
framework has four dimensions that reflect the essential
characteristics of a good and well-functioning financial system
that is: depth, access, efficiency and stability. Staff of the
International Monetary Fund (IMF) have built on the World
Bank framework by developing indices to measure the level of
development of financial institutions and markets in terms of
depth, access and efficiency, thus expanding the range of
indicators used to assess financial development. These
multidimensional indices capture the fact that financial services
are provided by multiple financial institutions offering a wide
array of products and services.
The Africa Financial Markets Index is a valuable addition to this
earlier work, where the ABSA Banking Group has partnered
with the Official Monetary and Financial Institutions Forum
(OMFIF), an independent think tank for central banking,
economic policy and public investment. This is with the explicit
objective of providing a toolkit for countries seeking to
strengthen their financial markets infrastructure.
The Bank of Botswana was fortunate to be represented at the
original launch of the Index in Washington DC during the 2017
Annual meetings of the IMF and World Bank. As already
mentioned, the official launch in Botswana comes shortly after
the release of the first annual update of the index. This is itself
an important event, as it is through such regular updates that
progress can be monitored. It is also to be welcomed that the
coverage of the index has already increased, from the original
17 countries, to 20 in the 2018 update.
As already explained, the Index ranks the maturity, openness
and accessibility of financial markets in Africa based on both
qualitative and quantitative criteria, focussing on six
fundamental pillars for financial market performance. The 2018
update also pays special attention to policies for enhancing
market growth, including financial inclusion and investor
education.
Most of the surveyed countries are implementing, or preparing
to implement national policy frameworks for financial market
development. The Index will, therefore, help provide them with
valuable insights and tools to improve the state of their financial
infrastructure and markets. As Maria Ramos, Chief Executive
of the ABSA Group, has correctly observed, the index facilitates
a meaningful debate about the maturity and accessibility of
Africa's financial markets, thus helping policymakers, investors,
regulators and other market participants to identify the areas
and initiatives which will drive the most significant
improvements.
In as much as I fully concur with the above observations, I
should inject a note of caution at this point. In conducting the
meaningful debate that Ms Ramos refers to, we should not just
highlight the successes, but give equal weight to areas where
more progress needs to be made. In this respect, the report
highlights continuing room for improvement in several areas.
These include, for many countries, the capacity of domestic
investors, which hinders the development of new financial
products and markets; and the need for further improvements
in market infrastructure and regulatory frameworks.
Similarly, while we should celebrate the improvement in the
ranking of Botswana from third to second in the 2018 index,
ranked only behind South Africa and ahead of continental
heavyweights such as Nigeria, there is no room for
complacency. There is considerable work to be done if we are
to develop a truly world class financial sector in Botswana. To
put this in perspective, while the ABSA Index ranks Botswana
second in Africa, in the latest update of the World Economic
country's
Forum Global Competitiveness Index, the financial
sector is ranked only 69th out of 140 countries.
Thus, while the overall score of 65 percent is encouraging, the
Index rightly highlights areas where there is considerable scope
for further improvement, for example, low levels of interbank
foreign exchange trading, very low bond market and equity
turnover and limited product diversity. Similar observations
were made in the 2017 Bank of Botswana Annual Report
Theme Chapter, which focussed on the importance of financial
sector development for inclusive and sustainable economic
growth.
To some extent, these deficiencies reflect structural factors
including the relatively small market size and limited need for
government borrowing. But there is also scope for beneficial
policy intervention with the relevant sectoral regulators working
in partnership with market participants.
At this point, let me once again assure you of the Bank of
Botswana's
wholehearted commitment to supporting financial
sector development in the country. First and foremost, this
comes from a relentless and consistent focus on the core
mandate of the central bank, namely, maintenance of price
stability, thus contributing to broader macroeconomic stability
for durable and sustainable growth; second, establishing
structures that promote financial stability; and, third, adoption of
a regulatory framework that balances prudential requirements
with allowing sufficient scope for innovation. And, above all,
recognition that "once inflation enters through the door, public
confidence and trust in the national currency will escape
through the other"!
At the recent sixth Botswana Stock Exchange Opening Bell
Ceremony, I provided some details on the specific initiatives
that the Bank is undertaking to spur the development of the
government bond market and stimulate the interbank market,
as well as on-going efforts to modernise both the central bank
and banking laws.
It suffices to conclude these remarks by, once more,
underscoring the importance of trust, governance and
transparency as the bedrock and essential preconditions for a
sound and sustainable financial sector. At the heart of any
financial system is public trust; regulation can help confer
legitimacy on regulated service providers, but the value of this
support is quickly eroded if the underlying integrity of
governance structures is not well-entrenched.
I do not need to remind you of the details of recent events in
Botswana that have severely tested this core principle while,
more broadly, in countries such as South Africa and the United
Kingdom, the competence and integrity of the accounting
profession is once more under intense public scrutiny. To their
credit, in each case, the concerned regulators in Botswana
have acted without fear or favour in addressing the challenges.
The regulatory structure has been tested and not found
wanting, and this is gratifying. But poor governance has a
corrosive effect that, left unchecked, could undermine public
confidence and trust in financial institutions and financial
markets, however carefully designed. I trust that,
notwithstanding these governance related challenges,
Botswana will continue to make progress, cementing its lofty
position in the continental rankings.
I thank you for your kind attention, and look forward to the next
update of the ABSA Africa Financial Markets Index.