Work to improve Ghana's capital markets continues apace

In line with financial markets around the globe, the Ghana Stock Exchange (GSE) experienced a tumultuous year in 2015, with the GSE Composite Index ending 11.77% lower than at the close of 2014. This was driven by a slowing economy and softening performance in the financial services sector. The financial index, which accounted for less than a quarter (22%) of the GSE’s market capitalisation but nearly half (48.9%) of its trading value in 2015, fell by 13.98% over the same period. Economic conditions, however, began to improve in the first half of 2016.

Growth Area

Given the general economic malaise of the past 12 months, growth sectors are highly sought after. Financial services companies continue to be the heavyweights of the GSE, but investors are also seeking out listings that are relatively buffered from the broader headwinds. “The most attractive industry is one in which the receivables are in dollars and they operate in the domestic market in cedi [the local currency],” Richard Amegashiti, head of brokerage services for Liberty Capital Holdings, told OBG.

Shares of commodity exporters are likely to enjoy support in 2017 if the dollar continues strengthening against other currencies. Demographic and income trends will continue to be a draw in the coming years. As Sulemana Mohammed, CEO for Doobia Limited, a Ghana-based financial information portal, told OBG, “Many fund managers want to be exposed to the consumer goods story in Africa, given the rising middle class and the impact that increasing disposable incomes can have on consumer spending.”

Indicators

The bourse is served by 21 licensed brokers and dealers. Listings on the main board remained unchanged in 2015 at 39, with no new listings or delistings over the course of the year, according to the GSE’s December 2015 market report. Equity market turnover in 2015 ticked slightly higher, with total volume traded hitting GHS246.4m ($63.6m) – an 18.7% increase over 2014. However, total value traded declined by 28% to GHS247.6m ($63.9m), and overall market capitalisation dropped to GHS57.12bn ($14.7bn), down 11% from 2014.

Public Offerings

Boosting liquidity remains a significant challenge for the GSE going forwards, as it is for many sub-Saharan African exchanges. In 2016 there have been multiple efforts to build up the initial public offering (IPO) pipeline.

One of the biggest listings in recent history occurred during that year, with the privatisation of a state-owned enterprise (SOE) in 2016. The Agricultural Development Bank (ADB), which is jointly held by the Ministry of Finance and Economic Planning (MoFEP) and the Bank of Ghana (BoG), was initially set to launch an IPO in March 2016.

The bank’s oversubscribed offering was expected to be the largest issue on the GSE to date. However, a failure by the bank’s two owners to approve the transaction by the initial March 2016 deadline subsequently led to the board of directors rejecting the prospective bid of GHS2 ($0.52) per share, which was below the GHS2.65 ($0.68) price sought by the company. “This sets a very bad precedent,” Roger Adjovu, general manager of Liberty Capital Holdings, told OBG, echoing the sentiment of much of the investor community.

Discussions about reopening the IPO followed. While making comments on the subject, Ekow Afedzie, deputy managing director of the GSE, told OBG: “If they relaunch the IPO, it will be good for the market. The market needs large-scale companies such as ADB to list so that we can improve liquidity.”

Then, in late November 2016 ADB re-launched its IPO, seeking to raise around GHS380m ($98m). Out of the total amount the bank was hoping to raise GHS180m ($46.4m) was expected to go to the central bank, which was giving up its shares in ADB. In December 2016 ADB announced the IPO had raised GHS326m ($84.1m), representing an 85% subscription level. According to the bank’s statement, the IPO was one of the largest IPOs ever undertaken on the GSE, and demonstrated the continued development of the Ghanaian capital markets. The bank announced that a total of 405 applications had been made for shares, with the bulk of them from domestic retail investors. Trading in ADB shares commenced on December 12, 2016.

Given the large number of sizeable SOEs in the country, there is scope for other listings of publicly held firms, although nothing has been announced to date. “There are other SOEs that could list on the market,” Adjovu told OBG. “Instead of selling assets in private placement, if the government shows that they would rather bring it to the public market, it would signal to the rest of the world that Ghana is ready, and multinationals would follow suit by listing more shares on the local market.”

On October 19, 2016 Access Bank Ghana, which is a subsidiary of the Nigeria-headquartered Access Bank Group, launched an IPO to secure funds to expand its operations, aiming to raise GHS104m ($26.8m). Prospective investors were required to purchase a minimum of 100 shares at a total of GHS4 ($1.03) per share. The bank later extended the closing period for the offer before listing on the GSE at the end of December 2016, making it the third international bank to do so.

Looking into 2017, two financial institutions have announced plans to list shares on the GSE. Local news portal Ghana Business News reported in April 2016 that Paa Kwese Ndoum, president of the privately held Ghanaian conglomerate Group Ndoum, announced his intention to list the company’s subsidiary bank – GN Bank – on the GSE in 2017. Likewise, local news site Graphic Online reported in June 2016 that the National Investment Bank had announced plans to seek additional capital through an offering on the GSE. Whereas the financial sector is among the most heavily traded sectors on the GSE, the listing of these two banks could provide a much-needed boost to liquidity on the exchange.

Fixed-Income Market

The fixed-income side of the market has traditionally been more dynamic, with a total of 168 bonds currently on the exchange. In 2016 the bond market performed well, with traded volumes up 40% compared to 2015. Most listed bonds are sovereign debt. According to the GSE, the value of government notes and bonds increased to GHS11.7bn ($3bn), up 25% from GHS9.4bn ($2.4bn) in 2014. A slight decline in the number of one-year notes issued in 2015 was offset by an increase in the number of longer-dated maturities, a trend which is expected to continue into 2017.

Nelly Mireku, principal economic officer overseeing budget management at the MoFEP, told OBG, “A substantial portion of Ghana’s domestic debt was in short-term, 91-day bills, which are more expensive. We have improved the maturity profile of some of our debt through refinancing and by moving towards issuing long-dated bonds. We have introduced a seven-year bond and are doing more five-year bonds, as well as two-year and one-year notes.”

This is in part intended to help reduce the government’s short-term borrowing profile in the local market. The sovereign bonds are highly sought-after by banks, which are looking for a safe and comfortable return in an environment where non-performing loans have been ticking upwards and borrowing activities slowing (see Banking chapter).

The smaller corporate fixed-income space was also active, with 15 issues in 2015, compared to only two the previous year, according to the GSE. The value of corporate bonds and notes topped GHS107m ($27.6m) in 2015, a more than three-fold increase over 2014. The majority of those issues, however, were two- and three-year notes issued by a single financial company.

One substantial hurdle to increasing the size of the market, particularly for longer maturities, is the high number of multinational companies operating in the country. “Many of the big companies in Ghana are foreign-owned, and they mostly have access to cheaper funds from their countries of origin than Ghana,” Sampson Akligoh, managing director of InvestCorp, told OBG. The country’s high interest rate environment means that corporations usually look offshore for long-term financing, rather than issuing local paper.

However, a new pension law (see Insurance chapter) is expected to bring in substantial amounts of capital to the markets, helping to give a boost to trading, liquidity and transparency. “The new pension law allows for new corporates to be listed, which in turn allows for the increased issuance of corporate bonds,” Clifford Mpare, CEO of Frontline Capital Advisors, told OBG.

Regulatory Reforms

As part of the new income tax law, which came into effect on January 1, 2016, the government changed the way it taxes corporations on their capital gains. Previously, capital gains on all assets were taxed at a flat rate of 15%, but gains from the sale of equity shares were exempted, so as not to create a deterrent to the further development of the capital markets.

Under the new tax regime, if there are gains from capital investment in the form of buildings, properties or shares they are treated as business or investment income and subject to the corporate tax rate, which is generally 25%.

In effect, the new corporate capital gains treatment removed the long-standing equity exemption and increased the level of taxation up to 25%. There is some existing concern that the change will make Ghana less competitive in the region. “It is a disincentive to investors,” Adjovu told OBG. “Nigeria does not have it. Other West African countries do not have a capital gains tax.”

Other changes to the laws governing the capital markets are expected going into 2017. Parliament is considering an update to the two-decades-old law that currently governs the securities industry. The bill under consideration would seek to bolster cross-border transactions, increase transparency and expand investment into alternative investments, such as derivatives and real estate, according to a January 2016 report from Graphic Online. An additional bill before Parliament would enable the issuance of municipal bonds, a source of financing not currently available in Ghana. The bill, which was first proposed in 2008, would help municipalities finance local infrastructure projects, although Samuel Kofi Ampah, general manager of GN Research, told OBG, “Currently, I do not think that the structures are in place to support the issuance of bonds by municipalities and districts. They lack the proper governance, transparency and accountability structures necessary to issue bonds.” One additional challenge in developing this market is that revenue-raising tools for both the local and regional governments are limited, although in a positive move, one of the bills passed by the Ghanaian Parliament in 2016 was the Securities Bill of 2015.

Demutualisation

Following in the footsteps of South Africa, Kenya and Nigeria, the GSE is moving towards shifting from a privately held company to a publicly traded one listed on the GSE in a process known as demutualisation. The GSE is in the very early stages of the endeavour, but the intention to demutualise is clear. Sam Mensah, the then GSE chairman, stated at the exchange’s annual meeting in July 2016 that an expert committee was in place to develop a roadmap for that purpose, and according to the GSE, the process and timeline for demutualisation will be decided upon by the end of 2016.

Alternative Exchange

The Ghana Alternative Market (GAX), which seeks to lower the barriers to entry for smaller and less-established companies, began listing companies in 2015. As Afedzie told OBG, “GAX was set up about two years ago and is growing very fast. To date we have about four equities listed on GAX and another four on the debt side, all within a year. Liquidity for those shares for now is on the low side, but as we get more companies on GAX, we expect to attract more investors.”

In an effort to encourage more companies to begin trading on GAX, the GSE has put together a package of incentives. The centrepiece of the incentives package is a Listing Support Fund, through which small and medium-sized enterprises can obtain financial support for legal fees, financial advisory services and broker charges in order to help defray the costs of going public.

Turning to the main board, the GSE introduced measures to help increase the overall float on the exchange. Afedzie told OBG, “We instituted a policy that any company issuing shares [for the first time] must issue at least 100m shares. This is in addition to the requirement that companies float at least 25% of the company.” By supporting both the number of companies listed and the number of shares available for trade, the GSE expects overall liquidity on the exchange to gradually improve.

Commodities Exchange

Following years of deliberations, Ghana is also poised to launch a commodities exchange. Spearheaded by the Ministry of Trade and Industry, the Ghana Commodity Exchange (GCX) – slated to launch in 2017 – would be the first such exchange in West Africa, although similar projects already exist, for example, in Addis Ababa, Ethiopia, or are under way elsewhere on the continent, including in Nigeria and Egypt.

The GCX is set to offer a transparent and ready market for farmers’ goods and to help decrease post-harvest losses of agricultural produce along the supply chain. The project would include eight warehouses that would enable farmers to have easier access to the platform. The exchange is set to start with spot trading, with futures and other derivatives contracts to be phased in.

A public-private partnership between the Ghanaian government and a private sector financing consortium, GCX’s buildout is to be led by Addis Ababa-based Eleni Exchanges, a company that specialises in establishing and operating commodity exchanges in frontier markets.

Given the reliance of the economy on commodities such as gold and cocoa, the ability to trade these and other commodities locally in Accra does offer a promising opportunity to investors. Ampah told OBG, “The commodities exchange is something that can really spur the economy. The exchange can promote more competitive pricing in our traditional exports and assist in the development of our non-traditional commodity exports. It will also give monetary value to farmers’ hard work and help eradicate the low interest in farming among the youth in Ghana.”

Cross-Border Cooperation Moves

One potential large-scale reform that could give a significant boost to trading and listings is the West African Capital Markets Integration (WACMI) programme, which would more closely align the stock exchanges of Ghana, Côte d’Ivoire, Nigeria, Sierra Leone and Cape Verde, as well as the regional Bourse Régionale des Valeurs Mobilières, eventually allowing brokers from each country to begin to trade directly on any of the four exchanges.

The programme was launched in January 2013 and is divided into three phases. Phase 1 allows foreign brokers to trade in participating countries using a domestic broker as an intermediary. The inaugural trade undertaken as part of the initiative occurred in July 2015 between the Nigerian investment company United Capital Securities and Ghana’s CAL Bank.

Under phase 2 of the programme a subset of brokers will be licensed to trade directly on other exchanges without the need of an intermediary. The third and final phase envisions the creation of a cloud-based trading platform in which brokers can trade on any of the four exchanges directly from their computer and equity issuers have direct access to capital from across the region.

The WACMI programme, while still in its infancy with less than 10 cross-border trades executed as of March 2016, is expected to move into phase 2 during the first half of 2017. Mohammed told OBG, “I think that the WACMI will be beneficial for Ghana and beneficial for the region as a whole.”

While the programme is now just getting off the ground, investors look to it as an opportunity for Ghanaian firms to attract more capital, opening the door for companies to more easily market themselves both at home and abroad.

Investor Relations

Firms are required to report audited results quarterly and annually, and firms are generally very transparent about information that might have an impact on share prices. Afedzie told OBG, “In terms of transparency, I rate the level of disclosure as quite high. The information is readily accessible and technology is starting to play a part.”

However, the Securities and Exchange Commission (SEC) is working to further increase the level to which information about publicly traded companies is more widely available and searchable online. Beyond minimum disclosure requirements, there is little active engagement with investors, as evidenced by a lack of robust investor relations programmes at listed firms. CAL Bank is often cited by investors as the primary exception, with UT Bank and Ecobank also setting up investor relations operations. Speaking about what is required to get a strong investor relation programme off the ground, Dzifa Amegashie, head of corporate and investor relations at CAL Bank, told OBG, “If management and the board are not interested, it is not going to work.”

Retail Investors

Expanding the pool of retail investors in the market – as is the case in so many emerging and frontier markets – has been challenging. In order to stoke interest in equity and debt trading, the SEC and GSE have developed a financial education programme which is geared towards retail investors. The GSE has spearheaded a school-based programme which is focused on educating the next generation of investors, while the SEC sponsors an annual Capital Markets Week to raise broader awareness – although the programmes have had mixed results.

Other initiatives, such as the BoG’s financial inclusion initiatives, the nascent growth of mobile finance and the expansion of pension coverage by the National Insurance Commission, could also contribute to raising interest in the country’s capital markets (see Insurance chapter).

Outlook

The Ghanaian capital markets have a long road ahead. Expanding equity listings, promoting the languishing bond market and introducing more sophisticated products – all while maintaining adequate oversight and supervision – will remain as significant challenges in the coming years. Still, Ghana is fortunate to have at its disposal all of the tools necessary to meet these challenges head-on. The question remains, however, whether the country is able to develop a comprehensive strategy and build consensus among all stakeholders to see it through to the end. Should it be successful in creating such a strategy, it will reap the benefits both on the exchange as well as in the wider economy.