A stable financial system is capable of efficiently allocating resources, assessing and managing financial risks, maintaining employment levels close to the economy’s natural rate, and eliminating relative price movements of real or financial assets that will affect monetary stability or employment levels.
The main factors that affect the stability of the financial system are bank lending rate, tangibility, and GDP growth rate, control of corruption, rule of law effectiveness, bank concentration, bank efficiency, and historical level of bank stability.
In order to overcome such challenges, developing countries, especially in Africa, are expected to strengthen collaboration, share best practices, and raise awareness among central bankers of foreign exchange risk management and solutions.
Today’s guest, Sonia Essobmagje, is the head of the Finance and Domestic Resource Mobilization Section in the Macroeconomic Policy and Governance Division of the United Nations Economic Commission for Africa.
With over 17 years of combined experience in financial markets, sustainable finance, business support advisory services, and structured finance, Sonia brings a wealth of knowledge to her role. As section chief, she advocates for the deepening of the financing architecture and the development of capital markets to increase savings, investment pools, and mobilize additional capital.
Key work programs include risk management, alternative investments, and capital market sustainability. Prior to this position, Sonia spent nearly 15 years as an investment banker, gaining extensive knowledge of financing solutions and capital markets.
Her expertise also extends to sustainable and impact finance. Sonia holds a Master of Science in Trading and Asset Management from ESLSCA Business School, as well as a Master of Corporate Finance from California State University and the University of Cergy Pontoise. She has been a CFA charter holder since 2017.
In a recent interview with The Ethiopian Herald, Sonia Essobmagje highlighted the fundamental impact of aspects on capital market development and the significance of well-developed domestic capital markets as a critical enabler for mobilizing domestic resources, mitigating currency risk, and fostering a stable environment for investment. She also emphasized that prioritizing local currency financing is a proactive step to protect continental economies from external shocks and create a more resilient financial ecosystem. Have a nice read!
So, just to start, could you explain today’s event, the three-day event objective, and what it will entail?
Yes, certainly. This workshop on Local Currency Financing and Capital Market Development for Central Banks is jointly organized with TCX, TDB, FSD Africa, and the main idea is essentially to bring together all the African central banks to discuss the challenges of financing our economies in local currency, the various hedging mechanisms that can be utilized, especially due to the vulnerability of our countries to foreign exchange rate fluctuations. That’s the primary focus.
Secondly, central banks have a key role in driving the development of African capital markets. We aim to present tools they can utilize to ease the management of reserves, monetary policy, and their impact on financial markets. We also want to raise awareness about best standards in regulatory frameworks and how they can implement similar frameworks in local economies.
Finally, we aim to discuss how they can mitigate risks to attract foreign investments.
From what you’ve shared, what are the major risks in Africa’s domestic finance, and how do you advise countries to manage them?
There are various risks. Firstly, liquidity is a major concern. Our capital markets are still relatively small, and the level of development varies across economies. However, there is room for further development, especially considering global trends. Liquidity is crucial for attracting investors, both domestic and international.
Another challenge is channeling savings, whether informal or formal, through the formal financial system by leveraging capital markets. It’s essential to build capacity within countries to create a conducive environment and equip market players with the knowledge of financial instruments to diversify portfolios and significantly contribute to financing their economies.
Regarding African capital markets, what is the current stage of development, and how does it vary across the continent?
At the continental level, there is still room for improvement in terms of increasing liquidity, diversifying product offerings, and engaging additional stakeholders. While some countries have strong capital markets, others lack stock exchanges. Out of the 54 countries, only 28 have stock exchanges. Harmonizing rules and supporting the financial system are essential, especially with the implementation of AfCFTA.
So, when we talk about using domestic resources to finance in Africa, what exactly do you mean by that? And to what extent have these resources been developed to support the continent’s economy?
I believe that for any country in the world, growth should be inclusive. By inclusive, I mean that it should be driven by internal factors or drivers, such as a strong private sector and providing the necessary infrastructure to industrialize our country. This will help build the next multinational corporations in Africa. This trend is consistent in every country.
The private sector is the key driver of economic growth. One of the reasons why we need to mobilize more resources is to support our private sector. We have observed the challenges African countries face in tapping into international markets, which is even more difficult for small MSMEs. To aid them in their growth journey, we must ensure they have the necessary resources. Access to finance has been a critical constraint for the private sector.
Through various programs and other initiatives of ECA, we aim to address these issues. Ultimately, a strong private sector is essential if we want to achieve Agenda 2063 or the SDGs. This cannot be accomplished without a robust financial sector. Therefore, it is crucial to strike a balance between external financial flows and domestic resources. The limited fiscal space in our countries has restricted what we can achieve. The significant financing gap for infrastructure in Africa is still a pressing concern.
Sustainable economic growth is unattainable without infrastructure, energy, and connectivity. Developing these areas will support countries in their long-term sustainable development goals. The financial markets in Africa need to have the capacity to finance the economies and development needs of the continent’s countries.
There is potential for growth, but we must build the necessary capacity. This is why convening meetings with partners is just the first step.
We must continue to push further, considering the diverse challenges each country faces. Some countries may require capacity building, a proper regulatory framework, or attractive financial instruments. We must understand each country’s context and provide appropriate support, ensuring a regional perspective while leaving no country behind.
In the financial markets in Africa, to what extent do they have the capacity to finance the economies or development needs of the countries on the continent?
There is potential. In terms of capacity, we still need to build it. This is why having all these partners together and organizing such meetings is just the first step. We should not stop there.
Instead, we should push further. Each country faces different challenges, such as capacity building, lack of a proper regulatory framework, or attractive financial instruments.
We need to understand the context of each country and provide appropriate support. It’s important to have a regional perspective while ensuring no one is left behind, as you mentioned earlier, with 26 stock exchanges or capital markets in Africa covering approximately 32 countries, including regional stock exchanges for West and Central Africa.
All African countries should aim to develop their financial sector, whether through their own domestic market or regional stock exchanges. The key is to secure access to finance, critical for our economies’ resilience. We must create a strong dynamic to incentivize the private sector to support economic development fully.
What do you mean by that?
That means all African countries should aim to develop their financial sector. One option could be to focus on their domestic market, while another could be through regional stock exchanges. However, the most important aspect is to ensure access to finance, as this is critical for our economies.
What we have learned from the recent crisis is that we are not resilient enough and need to increase our resilience towards shocks. This cannot be achieved if our growth is still driven by external factors. Therefore, we must create a strong dynamic to incentivize the private sector to fully support the development of our economies.
Are there stock exchange markets operating outside of Africa that support the African economy?
The role of capital markets is essential in this. For example, South Africa has a strong capital market with a variety of financial instruments, allowing the government to source funding locally. The private sector can also raise finance through the local stock exchange, attracting both domestic and international investors.
Developing our capital markets extends beyond our borders and can help attract more international investors and finance to Africa. However, there is still a challenge due to the misperception of risk in Africa. Proper communication and improving regulatory frameworks are key to addressing this issue and mitigating concerns for investors.
Investing in a country becomes risky if there is uncertainty about collecting returns. Proper regulatory frameworks aligned with international standards are essential to ensure transparency and stability for investors. Clarifying rules in case of defaults or market disruptions is crucial to maintaining investor confidence.
Thank you very much.
It is my pleasure.
BY ZEKARIAS WOLDEMARIAM
THE ETHIOPIAN HERALD SATURDAY 6 JULY 2024
