Viewpoint: Kweku Bedu-Addo
Ghana has experienced some formidable macroeconomic challenges since 2013, characterised by high inflation in excess of 20% per annum; a slowdown in real annual GDP growth to below 4%; a sharp rise in the deficit-to-GDP ratio to above 12%; a debt-to-GDP ratio higher than 60%; a sharp annual depreciation of the Ghanaian cedi in consecutive years; and an extended energy crisis. In addition, the country signed on to a three-year IMF front-loaded extended credit facility in 2014, which involved a front-loaded fiscal adjustment with inevitable adverse consequences on economic growth, given the government’s dominance in the economy. At the onset of 2016 the Ghanaian economy was also impacted by the significant volatility suffered by emerging markets.
The energy crisis compelled a lot of companies to invest in off-grid solutions, which adversely impacted the bottom line. Manufacturing and financial services companies were hit, and the cyclical collapse of commodity prices, including gold, cocoa and crude oil – which are all very relevant to Ghana’s economic performance – further compounded the structural challenges to the economy.
Under these circumstances, it is understandable that investors maintained a cautious approach to new investment in Ghana. With the money market offering very high yields relative to the equities market and critical macroeconomic indicators beginning to stabilise and trend positively, we are now seeing a gradual and cautious uptake of Ghana risk by investors, once again. In the short term, the economic challenges have had an adverse effect on earnings across the economy, including companies listed on the GSE. However, as these pressures begin to ease, we can expect a return to more benign market conditions that will enable the continuation of investment and growth in earnings. We also expect this to coincide with a drop in yields of money market instruments and a switch, by investors, towards equities.
In November 2016 the government of Ghana successfully issued a 10-year local currency bond with a yield of 19%. The target issuance was heavily oversubscribed, which is a very promising indicator of the general direction of yields, as well as money market activities. It may ultimately bode well for the equities market, as yields on short-term instruments are expected to fall due to sustained fiscal and monetary discipline. It is our expectation that more benchmark issues on the bond market will contribute to an extension of the local yield curve beyond 10 years to 15 and 20 years, respectively. This is consistent with Ghana’s frontier market peers, Nigeria and Kenya.
At the GSE we also want to see greater participation of local asset managers and pension funds in both the equity and bond markets, and to avoid over reliance on foreign portfolio investors in driving trading activity. This diversification will be most welcome as it minimises volatility in the currency market.
As the domestic fund management industry grows, we expect larger pools of liquidity to create healthy competition with foreign flows for listed securities. The creation of the Ghana Fixed Income Market (GFIM) in 2015 to help facilitate secondary money market development is progressing well, as trading activity continues to trend upward with an improved and transparent price-discovery mechanism.
The Ghana Alternative Market (GAX) has also been created to facilitate the listing of small and medium-sized enterprises (SMEs).
There are promising signs that SMEs will be tapping into this especially, as arrangements have advanced far enough to provide financial support for funding advisory and pre-listing services. In the medium term, the expansion of market arrangements beyond the main exchange of the GSE, to include the GFIM and the GAX, will facilitate more diversified channels and instruments for broader investor participation along the anticipated road to recovery and growth.
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