Recent reforms are likely to boost stability and draw in capital

Benefitting from a broader increase in interest in frontier economies and strong headline growth, Ghana’s capital markets have performed well in recent years, with the Ghana Stock Exchange (GSE) Composite Index up 71.81% in 2013. Secondary listings and new initial public offerings (IPOs) and funds have increased investor options on the bourse, while a number of reforms have also been implemented and continue to be undertaken that could improve the soundness and stability of the sector over the medium and long term. Brokers are being recapitalised, a new securities law is being drafted and private pensions are being introduced, which has led to an increase in the number and quality of intermediaries. In addition, a new pension law could draw in large amounts of capital, helping to boost trading, liquidity and transparency in the market.

Nevertheless, the sector faces challenges common to many African markets. Liquidity and churn are low and listings are limited, while a more constrained macroeconomic situation in the second half of 2014 has led to a drop in the composite index from its early 2014 highs above 2400 to approximately 2100 later in the year. While the overall outlook for the sector is bullish, as with the rest of the economy, the capital markets are facing near- and medium-term turbulence as the state looks to bring its balance sheet under control.

Decades Of Reform

The establishment of the GSE was first suggested in 1969; in 1971 the Stock Exchange Act was implemented and the Accra Stock Exchange company was formed, but it never actually started to operate. The GSE was finally formed in 1989, and trading began in 1990. The exchange went from being a private company limited by guarantee to a public company limited by guarantee in 1994 and is now governed by a council of members, banks, insurance companies and others. Market infrastructure has also improved over time. A continuous auction trading system was introduced in 2001, though trading still remained largely manual. Clearing and settlement were also manual; settlement improved to T+3 (trade date plus three days) in 2003, from T+5, and had been as long as T+14 in the past. The trading platform was automated, and electronic clearing and settlement were introduced in 2009. Trading hours were extended in 2011 and a new method of calculating closing price was introduced that year.

The Central Securities Depository (CSD) was created by the central bank in 2004, while the Securities Depository Company (SDC) was established in 2008. The former was for government, central bank and Ghana Cocoa Board securities, while the latter was for stocks. In early 2014 the CSD and SDC were merged. The surviving entity, which is 82% owned by the central bank, is the CSD (the stock exchange is the other shareholder and can increase its stake to 30%).

Focus On Capital

By 2014 the GSE, which less than a decade earlier had used white boards to display current pricing, was a modern and well-functioning equity market. According to the Securities and Exchange Commission (SCE), as of the end of 2013 Ghana had 24 licensed broker dealers, 83 investment advisors, 15 primary dealers, 21 mutual funds and 17 custodians. The sector has expanded considerably: in 2000 the country had 14 broker dealers, and in 2005 Ghana had three custodians, according to the IMF. According to the CSD, the largest broker in the country in the second quarter of 2014 was Africa Alliance Securities (with 24.86% of buys by value and 24.56% of sells). Databank had 17.52% and 14.21%, followed by SIC-Financial Services with 13.58% and 12.43%, respectively.

The GSE has enjoyed a tax holiday since its founding – in the hope that the exemption will help it increase its capitalisation – and the holiday was extended for another five years in 2011. Investments in shares are free from capital gains tax, while mutual funds and unit trusts are exempt from value-added tax. Dividends face an 8% withholding tax (for domestic and foreign investors), but that is the final tax on those payments.

The Ghana stock market is open in terms of foreign investment. Non-residents are allowed to freely repatriate their retained earnings, capital gains, dividends or interest payments. Foreign companies are also free to list on the exchange, as exemplified by the secondary listing of Tullow, the UK- and Ireland-listed oil company, on the GSE – a rarity for an Africa bourse, where few multinational extractive firms solicit domestic capital. Foreign portfolio investors have also been active in Ghanaian securities. In the six months to June 2014, 46.23% of shares (by value) were bought by non-resident foreigners, while 51.94% were sold by them. At the end of the second quarter of 2014 foreign investors held around 22% of all shares in the country. “Foreign investors tend to be more optimistic than local investors. Having seen industries develop overseas, foreign investors often spot opportunities overlooked by Ghanaian investors,” Robert Anamolga, sales and marketing manager of Gold Coast Securities, told OBG.

Small Market

The market has seen some powerful surges in investor interest in previous years. In 2004, for example, it was the world’s best-performing stock market, with shares up 144% that year. In 2013, 10 stocks more than doubled in price. However, it continues to grapple with constraints common mainly to African bourses, most notably the fact that the domestic equity market is relatively small and lacking in activity. The market only has 34 shares. While this is up from 22 in 2000 and 30 in 2005, it is down from 36 in 2009 and is too few to make a substantial market.

Trading is invariably light. On a typical day in 2014, fewer than half of the listed shares were traded at all. In 2013 eight of the 34 shares on the market did not trade at all, and more than half of the trading was concentrated in banking. Ghana’s market capitalisation was GHS63bn ($24bn) in early September 2014, up from GHS61.1bn ($23.3bn) at the end of 2013 and GHS57.3bn ($21.8bn) at the end of 2012. Market capitalisation has risen significantly since the market opened, going from GHS3m ($1.14m) in 1990 to more than GHS300m ($114.4m) in a decade, and breaking the GHS1bn ($381.2m) mark in 2003. Market capitalisation doubled to GHS48bn ($18.3bn) when Tullow Oil listed in 2011. Volume has risen 10-fold since 2005. Still, Ghana’s market remains one of the smallest in the world, smaller in terms of market capitalisation than Botswana’s and Uganda’s, according to the World Bank.


Encouraging listings, as with emerging markets around the world, remains a priority for Ghana and here it has had some success. In addition to Tullow’s 2011 listing, an exchange traded fund, ABSA NewGold, debuted on the GSE in 2012. Prior to those two new entrants, the last IPOs in the country were by petroleum distributor Ghana Oil Company and local insurer SIC, in 2007, but activity has picked up in 2014, with an IPO in April by Mega African Capital. The company, an investment firm owned by Ghana’s Oak Partners, sold 1.3m shares. According to local press reports, there are a number of potential IPOs in the pipeline as well, some with significant potential to stimulate trading and capitalisation growth. The Agricultural Development Bank (ADB) has said it is interested is undertaking an IPO, and it is expected that the share sale will happen some time in 2015. The ADB is 48% owned by the Bank of Ghana (BoG) and 52% owned by the government of Ghana. It was planning to hold an IPO a number of years ago, but that transaction never materialised.

Other companies listed by local media as candidates for future IPOs include state-owned entities the government would like to privatise by 2016, such as Gihoc Distilleries, Abosso Glass, Bolga Meat, Bonsa Tyre, Eredec Hotel, Catering Rest House and Ghana National Trading Corporation. A local private equity firm, Fortiz, which acquired a majority stake in Merchant Bank Ghana in December 2013, has also said that it hopes to have shares trading on the GSE within three years. “A lot of companies want to list,” said Sulemana Mohammed, financials research specialist at Ecobank Development Corporation. The emergence of an alternative market could also lead to more IPO activity, although efforts such as Nigeria’s Alternative Securities Market and Egypt’s Nile Stock Exchange mean it may prove an uphill battle in encouraging growth on the smaller board.

The Ghana Alternative Exchange (GAX) was started in the first quarter of 2013 and it enables start-up firms and small companies that would not be qualified for the main board to list. Requirements for the GAX are GHS250,000 ($95,300) in capital and 20 shareholders, as opposed to the GHS1m ($381,200) and 100 shareholders needed to list on the main board. The minimum capital for the GAX must be hit before listing but may be raised in a public offering prior to listing. The companies do not need to show profit, but they must submit a three-year business plan and be able to forecast profits by the third year. Listing fees are waived and companies need only pay a GHS2000 ($762) annual fee. As of late 2014 the exchange was in discussions with two firms, Intravenous Infusions and Juaben Oil Mills, about listing on the GAX. Other companies which have considered listing on the GAX include the aluminium product manufacturer Domod and the agro-industrial DEBT MARKET: As with most West African bond segments, the debt markets are dominated by the public sector. “The recent fiscal challenges have not significantly impacted domestic appetite for government debt,” Martin Ofori, CEO of Crystal Capital, told OBG. “Investors still regard these instruments as virtually risk-free.” In the second quarter of 2014 only one new issue was recorded by the CSS. Barclays sold GHS38.8m ($14.8m) of 91-day corporate bills. However, interest is increasing. In 2013 both the Electricity Company of Ghana and the Volta River Authority, both state-owned utilities, were considering the issue of debt securities. Ghana Home Loans said in 2013 that it was hoping to sell mortgage-backed bonds. In 2012 the government said it wanted to push corporate bond issues and that it was targeting six to come out over the following two years. The ministry felt the bond market would allow firms to raise cheap funds without having to raise funds in foreign currencies and face exchange losses.

The vast majority of the fixed-income activity is government-related. In the second quarter of 2014 the government of Ghana issued GHS8.1bn ($3.1bn) in debt securities; the Cocoa Board, GHS317.5m ($121m); and the BoG, GHS187.3m ($71.4m). The sales were in total oversubscribed and the government issued more securities in the second quarter of 2014 than it did in the first quarter of 2014 and in the second quarter of 2013. As with most regional bond markets, most of the debt is piled up at the short end. A full 74.87% of debt securities sold in the second quarter were 91-day government bills. Ghana has released longer maturities, although a changing fiscal situation – with rising debt and the government grappling with twin deficits – has prompted the cancellation of some auctions of longer dated paper. A five-year bond was pulled in March 2014 and a seven-year one in May 2014. The BoG also cancelled the sale of five-year bonds in March 2014.

Rates have shot up for securities that can still be issued. The 91-day bills were sold at 25.3339% in early September 2014, a four-year high. At the end of 2011 the 91-day rate was under 11%, according to BoG statistics. However, the government has been very successful in the international bond markets in recent years, serving as one of the first African economies to sell eurobonds in 2007, with a $750m tranche of 10-year bonds. Ghana also issued $750m of 10-year bonds in July 2013. In 2014 the government began work on a $1bn international bond issue. Although the country is discussing assistance from the IMF, and in spite of the fiscal challenges the government is facing, the transaction raised significant interest. In September 2014 the bond sold at a coupon rate of 8.125% was only slightly higher than its previous bonds, and was oversubscribed by $3bn. The proposed structure includes three tranches with repayments to be made in 2024, 2025 and 2026. The positive reaction to the bond, which will fund infrastructure and pay down debt, resulted in the strengthening of the cedi and an overall improvement in sentiment. As a result, the country is in a good position to enter negotiations with the IMF and to reach a cooperative agreement.

Pensions To The Rescue

Another positive development is the expansion of private pension coverage. In 2006 pension reform began when a report was issued recommending the establishment of a three-pillar system (see Insurance chapter). The country has been covered by a social security system since 1965, first by a fund, then by the Social Security and National Insurance Trust (SSNIT) as a provident fund and then by SSNIT as a full social security scheme. However, the programmes were inadequate in terms of cover and coverage. As a result, a law was put into effect in 2010 that create a system closer to an international best practice three-tiered pension regime. Under the programme, a total of 18.5% of wages are committed to retirement and health, 5.5% from the employee and 13% from the employer. Of that, 2.5% goes towards funding health care and 5% goes towards a privately managed second pillar. SSNIT gets the rest. For the capital markets, the new system is a key development. It is estimated that $400m a year could go into the pension sector, and a third of that could end up being invested in the stock market. Much of the rest could go into bonds, which could help the government fund infrastructure projects and could also help lower interest rates in the country. The amount of money going to the pension sector could be even greater if employees and the selfemployed contribute to third-tier voluntary pensions. Up to 35% of total income can be put into pensions taxfree. According to Clifford D Mpare, chairman and CEO of Frontline Capital Advisors, “Pension funds are really the only resource that can create a pool of capital for financing long-term development.”

Ultimately, the introduction of private pensions in the country is seen as a way to increase awareness among the average Ghanaian about the stock market and about investments in general. Employees will likely take a more active role in the use of their assets, and a lively investing culture could be the result.

Liquidity Too

The programme has led to an increase in the number and types of services providers. Funds must be managed by fund managers, controlled by trustees and held by custodians. As of August 1, 2014 the National Pensions Regulatory Authority had licensed 51 fund managers. It has also licensed at least 24 corporate trustees and 15 custodians. While the country has a strong banking sector and has had custodian banks for more than a decade, the sector has become far more competitive. According to the IMF, the country only had three custodian banks in 2005 and two trustees. The growth and expansion of the financial intermediaries could significantly boost the market, as it will bring more investment, technology, experience and competition to the financial sector. More importantly, the rise of private pension investors could improve the liquidity, pricing and activity on the stock market.

As it stands, the GSE lacks a significant base of institutional investors. SSNIT is the largest investor in the country, and follows a sit-and-hold strategy while insurance companies are restricted as to where they can put their money and cannot be significantly exposed to shares. The result is that little trading takes place and price discovery is not nearly as efficient as it could be. The second-pillar pension system will add a new group of investors to the market, who will likely more actively trade and will bring a diversity of investment views.

Other benefits are seen coming as a result of private pensions. SSNIT has a social component to its investment mandate, and while its investment in such assets as affordable housing may be widely supported, the returns on these investments may not be optimal. The concentration of so much of the country’s wealth in one organisation also has the potential to create certain risks. Spreading investments and oversight among different entities, such as trustees, fund managers and custodians, will increase the stability of the system and mitigate the risk of large-scale misallocation of funds.

Ultimately, the emergence of a pension industry could result in the filling out of the yield curve in Ghana. At present it stops at seven years. As a result, funds for larger projects need to be raised overseas, or they have to be raised domestically in the short term. There is either a currency mismatch or a maturity mismatch. A healthy pension sector provides the opportunity to resolve this issue. Retirement funds need to be invested over the long term, and managers will be looking for investments that mature 20 to 30 years out. Large projects can now be developed using domestic funds without refinancing risks. The government itself will also benefit from the longer yield curve. It will be able to access longer-term funds domestically and will not have to tap the international markets as much and expose itself to the dangers of currency fluctuations.

More Reforms Needed

In addition to the pension fund overhaul, a number of other major reforms have been undertaken recently. The SEC said in late 2014 that it is planning to introduce market makers to the bond market in order to improve liquidity. It also wants to establish the electronic trading of bonds. Most importantly, the authorities are working on shoring up the brokers. As with banking and insurance, capitalisation has been an area of focus for a number of years. In 2013 the GSE issued a directive ordering brokers to raise their capital from GHS100,000 ($38,120) to GHS1m ($381,200), with a target date of end-2013, although a deadline of March 2014 was set later. “A lot of brokers are not that strong,” said Ecobank’s Mohammed. “There’s still room for improvement.”

There has been a push to improve regulatory frameworks. According to the International Organisation of Securities Commissions (IOSCO), the Ghanaian stock market is not as open as it should be. The commission – an umbrella organisation for securities regulators – said the country needs to pass an updated securities law to meet international standards. Ghana has been trying to do this for several years, but without success.

The sector is governed by the Securities Industry Act 1993, and the Securities Industry Amendment Act 2000. Unit trust and mutual fund regulations were also issued in 2001. Additionally, a Securities Industry Bill was brought before the parliament in 2012, but it was never put up for a vote and was withdrawn and returned to the cabinet for additional review. The draft was designed to bring securities regulation up to international best-practice levels, with a particular emphasis on transparency, investor protection, efficiency, risk mitigation, fairness and monitoring. The bill would also have allowed for the sharing of information with regulatory counterparts regionally and globally, something not possible under the current law.

Among the concerns raised by IOSCO and others has been the ability of the Ministry of Finance to take control of the SEC for any reasons at all (though the SEC’s independence was enhanced under the Securities Industry Amendment Act). The IMF has observed in the past that the purview of the commission is limited and that it does not actually have the power to regulate the trading of government bonds.


The development of the capital markets in Ghana is part of a larger transformation that is occurring in the country. For years, the economy has been state-led, but Ghana is now shifting to the markets, which is allowing funds to be better deployed and investment decisions to better match the needs and demands of growth. The selling of international bonds has helped Ghana get significant exposure to the markets. Under pension reform, individuals and smaller institutions will become instrumental in utilising and distributing the country’s capital. Some market observers also say there is room to further leverage the capital markets.

“The government doesn’t really appreciate the role of the capital markets in economic development,” said Desmond Nartey, executive director of CDH Securities. “The SEC’s focus has been on regulation; it should also be on development,” he continued.

Still, according to Frederick Mensah, former CEO of Weston Capital, there remains a need in the country for new and different investment vehicles that are relevant to retail investment demand. “At the moment, there is a disconnect between what the market is looking for and what the investment community is doing,” Mensah told OBG. However, even while there is scope to expand activity in both debt and equities, the overall performance over the past several years has been impressive and the outlook for the longer term is equally good. The capital markets in Ghana are of course facing numerous challenges in the near and medium term. As the country deals with its larger macro-economic challenges, the stock and bond markets are going to have trouble developing. Difficult conditions will slow listings and could hinder further reforms.

However, at the same time, much of the solution to this problem lies in the capital markets. Ghana will be largely funded by the private sector, and to a great extent the future of its development depends upon the investment community. For that reason, the country is highly motivated to maintain the integrity of its markets and push reforms that will make them better, more efficient and more attractive to issuers and investors.


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The Report: Ghana 2014

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