Interview: Alex Asiedu
What is the state of the equity market in Ghana?
ALEX ASIEDU: In terms of asset allocation, existing conditions have remained largely unchanged since 2013. It may be difficult for the middle class to identify possible alternatives, as there are not many options available on the market. It is difficult to consider alternatives when they inevitably have uncertain returns. These alternatives are in competition with the near certainty of short-term, fixed-income options. The causes of this languid equity market are myriad, but the situation is improving. One of the key issues is the macroeconomic volatility that has recently characterised the Ghanaian market. Interest rates are in the 20s and are projected to move into the teens towards the end of the decade. Interest rates are a function of inflation, which has been fluctuating. In this environment, putting capital in long-term instruments can seem undesirable, as it is difficult to foresee the future value. This is why short-term investments make sense in a high interest environment: the capital market is competing against a fixed-income juggernaut. In addition, there are countless entities selling short-term debt, including microfinance, and savings and loans institutions. These firms represent over 90% of the industry, post high growth numbers and are adept at presenting themselves in a positive light.
How has technology helped small and medium-sized enterprises to seek equity financing?
ASIEDU: There is a prevailing culture where business owners are protective of their companies. Firms prefer taking high interest loans instead of giving up a share of business. A cultural shift must take place in the business community whereby business owners open up to equity investments as a viable option, as debt is not always the appropriate choice. However, this mindset has also been informed by history. To date, there has been generally poor governance and an unsatisfactory lending environment, which has led to diminished trust. With these issues currently improving, risk appetite is expected to grow and the equity market has a brighter future. By running educational campaigns, the stock exchange is working hard to encourage firms to list, but they are fighting a difficult battle. This year over 100,000 people used mobile money to take part in Ghana’s largest ever initial public offering, from MTN Ghana. Technology will stimulate increased participation in the markets and will also help to build trust.
In what ways do the movements of foreign currencies affect the performance of the Ghanaian cedi?
ASIEDU: Over the past year, the South African rand has fared worse than the cedi, however, their inflation rate is lower. This suggests that a large portion of Ghana’s inflation is imported, and capital flows coming in and going out are important. When large fund managers pull out of Ghana, the markets panic and the cedi reacts strongly. The direction of interest rates is very important for small and open economies like Ghana’s, especially when it is import-driven.
How are regulators ensuring a stable market?
ASIEDU: Regulations have been behind the curve.
For example, just $20,000 or equivalent in assets are required to set up an investment firm. This issue has resulted in incredibly low barriers to entry, but the current regulators at the central bank and the Securities and Exchange Commission are working to resolve it. They have a strong ethical code and reliable business experience. Capital requirements will be raised, while increased governance is also important, as it leads to larger and healthier firms. Unfortunately, concerns stemming from banking sector reforms have affected us as well. Depositors and investors group investment firms and banks together, and this has contributed to a small liquidity crisis. This is a short-term problem, but will ultimately be beneficial for financial services.
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