David Awuah-Darko, Managing Director, IC Securities, on the nascent bond market

Investment products attract financing, and Ghana’s capital market has been slowed down by a lack of choice. However, a rise in the amount of available corporate bonds will open new doors for investors and widen the financing options available to local companies. This will aid in making borrowing cheaper by dis-intermediating deposit-taking financial institutions and providing direct access to higher returns for savings mobilisation and investment management firms.

Developed non-government bond markets generally lead to expanded infrastructure and housing finance, better risk management for borrowers (including reduced refinancing mixes, reduced currency mismatches and lower interest rates), financial sector diversification and private sector development. With the enormous infrastructure needs, the private sector can bridge the financing gap by using capital markets to raise and deploy long-term local currency financing.

Despite successive concerted initiatives to address the lack of a deep and organised corporate bond market, key prerequisite conditions remain elusive. The must-haves include different variables that when implemented in the Ghanaian market would surely accelerate the rise of a solid bond market. Firstly, we need a well-defined regulatory framework for the issuance and trading of corporate bonds. This could also include a well-developed government yield curve, with options stretching out to at least 20 years.

A conducive and favourable tax regime would also help, with robust trading and settlement infrastructure that would help investors feel securely protected. This would need to be supported by a wide base of trained and well-capitalised market intermediaries to assist corporates in the issuance and investors in secondary market trading. After a track record of successful corporate issuers and issuances, the multiplier effect would have a great positive influence on the market.

Each of these elements may be tackled by direct policy initiatives giving rise to private market responses. An example is the National Bond Market Committee (NBMC), set up by the Ministry of Finance and Economic Planning to advise the government and regulatory bodies on developing the government bond market. The second incarnation of the NBMC’s work has focused on regulation, developing market infrastructure, educating market participants, and originating and issuing a few benchmark corporate bonds.

The ongoing pension reforms in Ghana will undoubtedly have a major impact on the corporate bond market. The directly comparable case studies from Kenya and Nigeria have each seen cumulative non-government bond issuance cross the $1bn mark within eight years of the commencement of pension reforms in those countries. At IC Securities, our research team expects approximately 15% of Ghana’s current $15bn bank loan market to be replaced by direct corporate bond issues, within the next seven years.

Whilst a mixture of the policy, regulatory and private sector initiatives outlined above will continue to spur the development of a vibrant corporate bond market, a sound macro-economic environment underpinned by a transparent fiscal regime is required to lend confidence to both issuers and investors in this asset class. The output indicators of a well-managed economy are clear: lower inflation, lower interest rates and more stable exchange rates. The presence of these indicators generally results in a virtuous cycle, especially in relation to the government bond market. A flatter and more predictable yield curve allows the sovereign the flexibility to extend tenors and to regularly publish an issuance calendar in advance without being constrained by either policy or political factors. Ghana has the main ingredient required to achieve fiscal stability – a proven and stable democratic environment. The next step is to enforce prudent debt management.

Ghana has made great strides in fostering the development of a corporate bond market. A final concerted effort is required by all development stakeholders – policy-makers, regulators and private sector practitioners – to deepen and grow the fledgling market.