Market makeover: New products and platforms are likely to increase activity and liquidity

Characterised by relatively low liquidity and limited activity on the equity side, Ghana’s capital markets have a moribund corporate debt market, though the government bond market is more active. However, transaction values have been rising and pension reforms being undertaken in 2012 are set to inject significant new funds into the market, which should help address the liquidity problem, and the government is working on an initiative to encourage more debt listings. Other planned initiatives include the creation of a window for small and medium-sized enterprises (SMEs) at the Ghana Stock Exchange (GSE), the launch of exchange-traded funds (ETFs) and the inception of a commodities exchange. The country’s stock market was transformed in 2011 with the listing of oil producer Tullow, which more than doubled the equity exchange’s market capitalisation, while sectors such as finance and utilities are set to drive further listings in the future.

MARKET REVIEW: As of March 2012 there were 34 companies listed on the GSE, which began operations in 1990. The value of trading on the GSE reached GHS446m ($264.4m) in 2011, the highest to date. The figure stood well above the previous annual record of GHS366m ($217m) in 2008 and total trading in 2010, which stood at GHS152m ($90.1m). However, 2012 got off to a slower start, with trading on the GSE for the first three months of the year standing at GHS18.3m ($10.9m), compared to GHS56.2m ($33.2m) in the same period of 2011.

The most heavily traded stock on the exchange in terms of value in 2011 was Ghana Commercial Bank, with GHS3.52m ($2.1m) worth of transactions. This accounted for close to half of all trading in financial shares, which were the most traded shares by sector, at GHS7.61m ($4.5m).

Oil producer Tullow is currently the largest firm listed on the GSE by market capitalisation, at GHS34.96bn ($20.7bn), or 63.3% of the GSE’s entire market capitalisation, followed by miner AngloGold Ashanti at GHS13.01bn ($7.7bn) or 23.6%, and Ecobank Transnational Corporation at GHS1.62bn ($960.5m) or 2.9%. All other listed firms have market caps of less than GHS1bn ($592.9m). Of the top 10 firms by market capitalisation, four are financial services firms, two are petroleum firms, two are miners and two are manufacturers.

As regards the debt market, during the first quarter of 2012 there were 88 two-year, nine three-year and three five-year government bonds listed on the GSE (with a combined value of GHS3.84bn, $2.3bn), in addition to one corporate bond, a five-year, 5% coupon dollar-denominated bond issued by local bank HFC. However, the HFC bond expired during the course of March 2012 and there were no corporate bonds listed on the GSE at the time of writing. There have been eleven primary issues listed on the GSE to date, nine of them issued by HFC.

As of 2010 there were 22 licensed broker-dealers in the country and 51 licensed investment advisers. There were also 24 collective investment schemes, of which 12 were unit trusts and 12 mutual funds.

REGULATION: The Securities and Exchange Commission (SEC) is the body responsible for regulating and overseeing trading in securities. Legislation and regulations governing the sector include the Securities Industry Law of 1993, amended in 2000; the SEC’s own regulations, which date from 2003; and the Unit Trusts and Mutual Funds Regulations of 2001. “The regulatory framework is fairly tight and monitoring is strong,” Yaw Adu-Koranteng, a research analyst at Gold Coast Securities, told OBG.

Recent regulatory developments include plans to allow small and medium-sized enterprises (SMEs) to list on the GSE on the basis of relaxed regulatory requirements (see analysis) and a move in July by the GSE to raise minimum capital requirements for brokerage firms 10-fold, from GHS100,000 ($59,290) to GHS1m ($592,900). Firms have until the end of 2013 to meet the new requirements, which also include increasing minimum tradable assets from GHS80,000 ($47,432) to GHS800,000 ($474,320). In other regulatory developments, the SEC is working on reforms that would allow for borrowing and lending securities and could permit short-selling. There is also talk of plans to develop a derivatives market, though concrete details remain scarce.

MARKET PERFORMANCE: The stock market performed well in the first half of 2011 and was up 10% in August 2011 but it fell after problems worsened in southern Europe. At the end of June 2012 the GSE Composite Index stood at 1045.8, up from 969.03 at the end of December 2011. However, the index was down on a year previously, having stood at 1188.91 at the end of June 2011. The fall, which came despite massive domestic economic growth, was partially due to global economic concerns.

As of mid-2012 the agro-processing and petroleum industries were among the best-performing sectors on the GSE for the year to date; manufacturing also performed well. The best-performing individual stock in the second quarter of 2012 was agro-industry firm Benso Oil Palm Plantation. Banking stocks by contrast have performed less well. Some stocks had positive returns but this was not the case overall. The prospects for the market are bright, due in part to pension reforms under way, as well as the country’s strong economic growth.

“Under the current system there is around GHS500m ($296.5m) sitting in the Central Bank not being used. Once this is dispersed it should have a big impact on the GSE, and we are expecting pensions to boost stock market performance in 2012, so the outlook is quite good,” said Adu-Koranteng.

LIMITED MARKET ACTIVITY: The GSE is characterised by relatively low liquidity in comparison to the major African markets. “Equity transactional volumes are low compared to markets such as Nigeria and Kenya,” Sulemana Mohammed, a research analyst at Ecobank Capital, told OBG.

A variety of factors have inhibited greater activity – both in terms of listings and transactions – on the GSE. Investors tend to buy and hold, and a single investor often owns a large proportion of a given companies’ shares. Additionally, there are few retail investors on the equity side. “The authorities need to encourage institutional investors to trade more. However, the pension reforms will bring more money into the market.”

Observers also talk of a cultural reluctance on the part of local business owners to cede even partial control of their companies. “The mind-set in Ghana is such that some business owners are sceptical about giving up part of their company, and do not see the benefit,” Seth Asante, the managing director of Gold Coast Securities, told OBG.

Others agree. Keli Gadzepko, executive vice-chairman of investment bank Databank, told OBG, “Some people are not really prepared to list, because they don’t understand the stock exchange, and in a lot of cases, for the amount of financing they need, a banking loan is easier. Some are also afraid of losing control of the company by listing.”

“Ghanaians like to have things in their name and would often rather own 100% of 10 than 10% of 200,” said Nii Anyetei Ampa-Sowa, the vice-president and head of research at Databank, which estimates that it controls around 90% of the Ghanaian mutual fund market. When the SME window begins (see analysis) operating at the GSE, more companies are likely to see the benefit of raising capital.

REFORMS FOR LIQUIDITY: The authorities are taking measures to combat the lack of liquidity. For example the SEC is pushing firms with few shares in circulation to dilute them, which Ampa-Sowa of Databank said has had an effect in some cases. In 2011 the GSE issued a directive that all companies should have at least 100m shares. While the ruling is due to be implemented in 2012, it is doubtful that will happen. Other proposed regulatory reforms could also boost activity on the stock exchange. “Some new regulations such as increased tax incentives might be necessary to boost listings,” Ampa-Sowa told OBG. “Without that, the target of reaching a total of 50 companies listed on the exchange within five years is probably not achievable.”

LISTINGS: While listings occur relatively infrequently, 2011 saw a crucially important one, namely the entry onto the GSE of shares in oil and gas exploration and production firm Tullow, which more than doubled the GSE’s capitalisation. Tullow operates Ghana’s Jubilee oilfield, the only currently producing field in the country, which began pumping oil in December 2010. The company, which is also listed on the London and Dublin stock exchanges, sold 3.53m shares and raised GHS109.5m ($64.9m) through the transaction, the first equity listing on the exchange in two and a half years.

Tullow is not the only oil firm looking at the Ghanaian stock exchange. In June 2011 the US’s Kosmos Energy, which has a 23.49% stake in the Jubilee field, announced plans to become the second oil and gas firm to list on the GSE, with the intention of raising around $50m in financing. The company had previously secured investments of almost $600m through an initial public offering (IPO) on the New York Stock Exchange in April 2011. The Ghanaian SEC in September said the listing was set to take place by the end of the year, before subsequently pushing this back to the first quarter of 2012. However, as of May 2012 the authority said it was still waiting for Kosmos to present its prospectus.

In 2011 there were also two equity delistings – namely CFAO and Accra Breweries – in addition to Tullow’s IPO. At the time The Report: Ghana 2012 went to press there had been no listings in 2012, though in April 2012 shareholders of Fidelity Bank Ghana approved plans for an IPO on the GSE in order to raise capital, to take place at some point between 2013 and 2015. Other relatively recent activity on the equity market included a rights listing by Ghana Guinness Breweries in October 2011, which raised GHS70m ($41.5m) and was 45% oversubscribed.

While the GSE has been characterised by relatively low liquidity and limited transactions, utilities and energy firms appear set to drive increased activity. For example, power generator VRA is reported to be preparing an IPO in the near future, while the Tema Oil Refinery is considering a listing by 2014 as part of the plans for its privatisation. Furthermore, in late May 2012, local media reported that the SEC was working to persuade three utility companies – namely Ghana Water, the Electricity Company of Ghana and the Volta River Authority – to look at listing on the GSE, as well as issuing corporate bonds.

ADDITIONAL REQUIREMENTS FOR BANKING: The banking sector is also a potential candidate to drive increased transactional activity. As noted above, Fidelity Bank is already planning an IPO. The Bank of Ghana (BoG) is requiring domestic banks to increase their capital to GHS60m ($35.6m) by the end of 2012 (foreign-owned banks have already done so) and has suggested that banks having difficulties raising the required additional funds should consider looking at the equity market. Seven of Ghana’s 27 fully licensed banks are currently listed on the GSE, leaving plenty of room for more to come on board. Kwesi Bekoe Ammissah-Arthur, the governor of the BoG, speaking in July 2011 suggested that one of the reasons for requiring local banks to increase their capital was to ensure that Ghanaian banks, as well as larger foreign banks, are able to compete in sectors such as oil and gas that require large amounts of capital; the GSE is well positioned to help with this.

“In a rapidly growing economy such as Ghana’s, banks being required to recapitalise is going to be a constant theme and the GSE is always going to provide an opportunity for them to do so,” Felix NyarkoPong, the CEO of uniBank, told OBG.

Banks thought to be considering IPOs in addition to Fidelity Bank include Agricultural Development Bank, which could be listed on the exchange by the end of 2013. Local communications company, RLG, is likely to list in the same timeframe.

Another financial sector firm considering a turn to the local capital market – though in this case to the debt rather than the equity markets – is Ghana Home Loans (GHL), a mortgage lender that has so far largely sourced its financing from foreign development finance institutions (see Banking chapter). The company is currently looking at either issuing bonds in order to be able to offer new mortgages or at securitising around half of its existing portfolio. “We would like to do something this year or next,” Kojo Addo-Kufuor, the chief operating officer of GHL, told OBG, speaking in May 2012. “There are some challenges; we would be looking at a 10-year investment, whereas most local investors want liquidity and an option of exiting investments in five years. However, we are close to identifying a structure that addresses this requirement.”

PENSION REFORMS: A development set to have a significant impact on market activity and liquidity is reform of Ghana’s pensions system. In 2004 the government established a Presidential Commission on Pensions tasked with considering the replacement of various parallel schemes that existed in the country and the establishment in their place of a universal pension system that would also bring workers from the informal sector under its umbrella. The commission in 2006 recommended the establishment of a three-tier pension scheme, based on contributions by employers and employees, and in 2008 the government enacted most of the recommendations in a new law, the National Pensions Act.

The scheme will consist of a first tier that is mandatory for all workers (in both the public and private sectors) and will be managed by the Social Security and National Insurance Trust (SSNIT); a second, privately managed tier that is also mandatory for all workers and is aimed primarily at building up lump-sum benefits; and a third voluntary tier is aimed at both employees in the formal sector, as well as workers in the informal sector. Contributions to the first and second tier will be equivalent to 10% and 5% of the employee’s salary, respectively (most of it to be contributed by the employer).

The second and third tiers will be privately managed by trustees approved by the National Pensions Regulatory Authority (NPRA), which is being established as part of the reforms, with the possibility of management being delegated to private pension fund managers licensed by the SEC.

FUND MANAGERS: These fund managers will be able to invest up to 25% of contributions in the local stock market, which should lead to a significant increase in available funds as well as liquidity. While under the old scheme the SSNIT also invested local pension contributions in the stock market, the new system is aimed at significantly expanding pension coverage, which should mean more funds are available, and therefore more can be invested in the GSE.

It is estimated that the pension reforms would bring at least an additional $10m a year into local equity markets. The use of private pension fund managers for the second and third tiers of the scheme should also help the local investment industry expand and increase in sophistication.

ETFS: In July 2011 the GSE announced plans to allow the listing of ETFs. The GSE would be the fourth stock exchange on the continent to do so, after South Africa, Botswana and – most recently, in December 2011 – Nigeria. The announcement was followed in November 2011 by the GSE issuing rules for introducing ETFs onto the Ghanaian market. The GSE also approached Absa Capital, a subsidiary of Barclays, to invite it to launch its gold ETF, NewGold ETF, as the first on the exchange.

The launch of similar ETFs on other African exchanges has led to significant increases in liquidity, which is something the GSE is currently lacking. The liquidity of the Botswana stock market reportedly doubled after the NewGold ETF was listed there. However, although the GSE said that NewGold could be listed as early as September 2011, pending the SEC’s approval, at the time of writing nearly a year later the listing had yet to go ahead. “The launch of ETFs hasn’t happened yet because of various technical and legal issues but it will probably happen this year,” said Adu-Koranteng.

Other market watchers are more circumspect. “The ETF exchange was a big talking point last year [2011] but the SEC currently has some issues with it and the topic has gone cold,” Ampa-Sowa told OBG. “There are also some negative perceptions surrounding investments that are linked to gold as a result of problems with the AngloGold Ashanti listing in the 1990s, when many retail investors thought they were going to receive gold bars. It will probably still happen but it is facing delays.”

COMMODITY EXCHANGE: Another major development is the planned launch of a commodity exchange, scheduled to begin operations by 2013. In summer 2012 media reports suggested that the project could face delays beyond 2013, though this appeared to be largely based on speculation.

A commodity exchange would go a long way towards guaranteeing farmers a fair price for their crops and livestock. Currently the means for agricultural commodities storage are lacking so farmers are unable to control or influence price.

The exchange is being established by the Ministry of Trade and will involve the establishment of a new trading system and a depository. Some have argued that the exchange should rather have been built in cooperation with the GSE and used its systems in order to avoid the need to build new systems from the ground up, which will add to the time and costs involved in setting up the project.

DEPOSITORIES: The Central Securities Depository (CSD), which was established in 2004 and is regulated by the Central Securities Depository Act 2007 (Act 733), is responsible for recording ownership of government securities. It also manages the primary auction system for government bonds on behalf of the BoG and processes coupon and maturity payments directly to beneficiary accounts through the BoG. The CSD is a wholly owned subsidiary of the BoG but operates independently.

While the CSD was initially set up with a view to eventually expand its mandate to equities and corporate bonds, the GSE established its own in-house securities depository for equities in 2008. However, the number of depositories is set to fall as the CSD and the GSE depository are set to merge.

“The market is too small for two depositories,” Stephen K Tetteh, the CEO of the CSD, told OBG. The two have signed a memorandum of understanding on cooperation. The two institutions are in the process of engaging an adviser for the transaction process and that the merger is scheduled to be completed by the end of 2012.

“The merger will bring some synergies to the market, as investors will no longer need to have separate accounts for both the GSE Depository and the CSD, for example,” said Tetteh. “The move will also bring additional weight and credibility to the market through the formation of a new company that is backed by both the BoG and the GSE. The merged entity will also settle in central bank funds, in line with international recommendations, instead of in commercial bank funds as is currently the case with the GSE,” Tetteh continued.

OUTLOOK: A range of initiatives and developments are set to transform the Ghanaian capital markets in coming years. Pension reforms under way are likely to significantly increase liquidity, as should the launch of new products and platforms such as ETFs, an SME window and a commodity exchange, in addition to deepening the industry’s sophistication. The financial and utilities sectors are likely to drive further listings in current years. Bringing the corporate bond market alive is likely to remain a challenge. Still, there is much scope for firms to raise finance this way. “Corporate bonds could become an effective way for companies to raise finance. Currently, most local companies only consider bank loans as the option to get finance,” Carol Annang, the CEO of New World Renaissance Securities, told OBG.

However, the pension system reform is also set to have an impact, and as the sophistication of the country’s financial sector deepens, new actors such as mortgage issuers are looking at this area too.