Bonds: Debt market activity in Ghana is increasing steadily

The restructuring of the financial market facilitated the creation and growth of the bond market in Ghana. The bond market has improved since the first trading of Ghana Stock Exchange (GSE) commemorative registered stock in 1990. These bonds were five-year debt instruments issued to provide a foundation for active bond trading on the newly created GSE. This was then followed by the Home Finance Company’s dollar housing bond series. The government flooded the market with a number of bonds as an attempt to boost the primary market.

The government’s listings enhanced bond trading, and this also showed commitment to the development of the debt market. Another major boost to the market was the issuing of the cedi-denominated African Development Bank bond, a two-year bond linked to 414.9bn Ghanaian old cedis, worth $45m, to provide long-term local currency financing to support development projects.

The Economy

Moody’s downgraded Ghana’s sovereign rating from B2 to B3 for the second time in March 2015, due mainly to the country’s worsening debt burden, large fiscal imbalances and sharp depreciation of the cedi. In spite of this, the positive review of the economy by the IMF, coupled with a partial bond guarantee by the World Bank and the resumption of donor support, has resulted in a recovery of the cedi against major currencies.

Ghana’s economy experienced an increase in public debt to GHS97.2bn ($25.1bn) as of December 2015, slowed economic growth, from 14% in 2011 to 4% in 2014, increased inflation at 17.1% in 2015, and high interest rates. The monetary policy rate is currently 25.5%, the current interbank rate is 25.4%, while a depreciating currency has presented challenges. The cedi has lost more than 60% of its value against the dollar over the last five years.

Established in May 2015, the Ghana Fixed Income Market is relatively new. It is a market to facilitate the secondary trading of all fixed-income securities. The market was established by stakeholders led by the Bank of Ghana, GSE, Central Securities Depository, Ghana Association of Bankers, Ministry of Finance and Economic Planning, Financial Markets Association of Ghana and licensed dealing members of the GSE. The market was launched to provide a fair, orderly, transparent and efficient market for fixed-income and other similar instruments.

Increasing Activity

A total of 22,394 transactions took place on the market from August to December 2015, with the overall value of bonds reaching GHS5.7bn ($1.5bn), showing that the efforts of stakeholders to establish and stimulate a more liquid and transparent bond market are beginning to yield fruit. The average monthly value of trades on the fixed income market was around GHS1bn ($258m) over the period. As more sovereign bonds, government bonds and corporate bonds are listed, activities are expected to see tremendous improvements over the coming years.

The government is planning to fund investment projects and budget needs from the domestic bond market by issuing local-currency debt instruments. The advantage of this policy is that it can serve as an effective strategy for Ghana to reduce exposure to exchange rate valuation effects that may be caused by excessive capital inflows followed by sudden stops and capital reversals. Analysts believe that this may also increase policy space, since it allows monetary authorities to respond to external shocks in commodity price swings via exchange rate depreciations without raising the debt-to-GDP ratio.

It is expected that the government will maintain a tight monetary and fiscal policy in the coming years, and economic recovery is expected in the medium term, with a GDP growth rate of 5.8% in 2016 and 8.7% the following year. This expansion is expected to have a positive impact on Ghana’s bond market.