Regional Financial Market Focus on Integration

MEFMI conducted a retreat for Heads of Financial Markets during the period 1 to 3 September 2014 in Maputo, Mozambique. The primary target was heads of financial market departments at central banks, senior central bank officials responsible for monetary policy implementation, supervisory and legal issues and senior officials from the ministries of finance and or economic planning responsible for domestic market policy formulation.

The primary objective of the retreat was to offer a unique opportunity for policy makers and market participants to share and contribute on critical issues impacting on financial market integration in the MEFMI region. The secondary objective was to ensure participants are able to come up with policy proposals and legal reform suggestions to encourage the integration of the regional financial markets.

The retreat was officially opened by the General Manager at the Bank of Mozambique, Ms. Joana Jacinto David Matsombe. In her opening remarks Ms. Matsombe described regional financial market integration as a market driven process that broadens and deepens financial links within a region. She highlighted that regional financial integration could potentially address several of the issues associated with the small, fragmented financial markets in Africa.  She also spoke about some of the benefits that accrue from financial integration such as bringing together scarce savings into a common pool. She pointed out that there are limits to the benefits from regional financial integration, which depend largely on the cohesion and the differences of the member countries. Ms. Matsombe encouraged countries to be firmly committed to the process of financial markets integration in order to achieve successful regional financial integration.

The workshop was attended by 24 participants, most of them being heads and assistant heads of financial market departments at central banks and representatives from related departments; risk management and reserves management. Out of the 24 participants, eight (8) were female representing 33%, while 16 were male, representing 67%.

The programme was designed in such a way that encouraged interactive participation. Some of the presentations provided an international investor perspective, highlighting what they would like to see in place in the financial markets and how they assess what they see in place before they invest in the region. There were presentations from the East African Community (EAC) and the Southern Africa Development Community (SADC) perspective on what is being done in the region to encourage financial markets integration.

The retreat provided invaluable knowledge and critical guidance to participants in the following areas:

• Influencing the direction of      financial market integration through the contributions of the policy      makers;
• Policy proposals and legal      reforms suggestions encouraging financial market integration; and       

• International perspectives on what needs to be in place in the regional financial markets in order to attract investments.

The main issues that came out of the presentations were as follows;

• The Impossible trinity forces policy makers to choose only 2 of the following 3 options:
  • Free flow of cross border capital;
  • Managed/fixed exchange rates; and
  • Independent monetary policy.
  • When a country focuses on a lower degree of financial openness, some of the potential benefits are currency stability, lower imported inflation, and maintaining monetary independence. While some of the challenges are Dutch disease leading to deteriorating trade balances, lack of financial development as foreign capital cannot serve as a catalyst for development. This type of focus works well when a country is running a current account surplus and does not need foreign capital.
  • When a country focuses on a lower degree of exchange rate management, some of the potential benefits are an ability to respond to local economic situations; foreign capital supply. While some of the challenges are volatile capital flows; currency volatility. This type of focus works well when a country is integrating into the global financial system.
  • When a country focuses on a lower degree of monetary policy independence, some of the benefits are low inflation; supply of capital from the pegged country or countries. However, the challenges are the inability to respond to domestic economic and inflation dynamics. This type of focus works well when countries are at a very high level of economic integration.

MEFMI region countries are experiencing high liquidity in the market and very wide spreads by the commercial banks. The number of Treasury bills in the market is high, which creates a situation of low prices and high yields. The commercial banks hold the treasury bills and make their money from the high rates – a situation known as ‘lazy banking’. To counter this, MEFMI region countries have to lengthen the yield curves, which allows for duration risk taking by the banks and for them to match their risk to their return. As an example which was given during the retreat was the Bank of Uganda, which is currently moving from a Treasury-bill  to Treasury bond ratio of 40%/60% to 30%/70% respectively.

It was also noted during the retreat that there are three drivers of capital market development:

• Physical infrastructure;
• Government debt stock; and
• Liquidity of the issued securities.

The regional countries are at different stages of development and thus the drawing together of capital markets would not benefit all countries. Thus, decisions have been reached to harmonise key factors while working to develop and bring the other countries together. This is called the principle of variable geometry, which describes the idea of a method of differentiated integration which acknowledges that there are developmental differences within the integration structure.

The EAC is looking to put up a regional switch to compete with visa, especially if they are able to offer lower prices and in so doing get a wider outreach. Currently there is Kenswith, Interlink and Umoja in the EAC countries.

Some of the challenges facing MEFMI region countries in the Banking area were highlighted during the retreat. These include the different monetary policy frameworks and instruments; currency convertibility (different currencies); convergence in fiscal policies – The question is should there be a single fiscal authority or not? What are the dynamics of either position; tax policy – variations in withholding tax, income tax; different practices and conventions, for example the settlement cycle, the capital account liberalisation, the foreign exchange market policies, etc.; different systems and levels of technological advancement; different levels of capital market development: liquidity and financial asset availability, savings base, financial literacy. On the other hand, some of the opportunities being witnessed in the region involve the adoption of  suitable technology, policies, practices that are tried and tested; Learning from the integration mistakes of other regions (Euro area, Asia, WAEMU, etc.) and not trying to re-invent the wheel; Banks can target wider markets and improve diversification. Merger and acquisitions and strategic alliances with other banks in sister states.