Macroeconomic performance and outlook
Ghana’s economy continued to expand in 2019, with real GDP growth estimated at 7.1%. High growth momen- tum since 2017 has consistently placed Ghana among Africa’s 10 fastest-growing economies. Improvements in the macroeconomic environment were accompanied by expansion in domestic demand due to increased private consumption. The industrial sector, with average annual growth exceeding 10%, was a major driver of growth in the three years to 2019. Agriculture will continue to be the second fastest-growing sector in the economy, but a financial sector clean-up that started in 2017 placed a temporary drag on growth of services.
In 2019, Ghana maintained its moderate fiscal and current account deficits, single-digit inflation, and a rel- atively stable exchange rate. The fiscal deficit improved from 3.5% of GDP in 2018 to 3.4% in 2019. However, the current account deficit rose from 3.1% of GDP to 3.5% as net flows in the income account outweighed gains in the trade account. A steady decline in nonfood inflation and tight monetary policy helped keep inflation within a medium-term target of 8 ± 2%. The exchange rate between the Ghana cedi and US dollar remained stable with volatility reflecting seasonal import-driven demand.
Increased public debt and shortfalls in domestic revenues pose challenges to further macroeconomic improvements. By September 2019, the debt-to-GDP ratio rose 3.2 percentage points year-on-year, mainly due to a $3 billion eurobond issue and to domestic borrowing, including a $2 billion financial sector bailout. Despite the low domestic resource mobilization and high cost of financial and energy sector reforms, the government remains committed to a deficit ceiling of no more than 5% of GDP, as required by the new Fiscal Responsibility Act.
Tailwinds and headwinds
Growth prospects remain positive, with increased output and stable global prices for Ghana’s main export
commodities. Domestic initiatives aim to increase pro- ductivity and boost output in key primary sectors and value chains. The 10-Point Industrialization Agenda seeks to expand output through coordinated public and private investment. Programs targeting higher agricul- tural productivity include Planting for Food and Jobs, Rearing for Food and Jobs, and Planting for Export and Rural Development.
The nascent manufacturing sector will broaden the basis for growth, focusing on agriculture-led industri- alization. Exports are largely unprocessed, and more than 18% of imports are food items—both opportunities for local value addition. Foreign direct investment (FDI) and portfolio investments provide low-cost capital for emerging value chains. As West Africa’s top FDI recip- ient, Ghana received more than a third of the region’s inflows in 2018, reflecting the country’s emerging skill base.
The government’s new Business Regulatory Reform program is expected to improve the business environ- ment and mobilize domestic revenue. Digital invest- ments, especially in the financial sector, will increase efficiency. With the African Continental Free Trade Agreement, Ghana’s industry will absorb increasing raw materials from the region, scale up manufacturing, and trade in processed and light manufactured products.
Despite the Fiscal Responsibility Act, the runup to elections might put pressures on the government to overspend and undertax which could derail progress toward fiscal consolidation.
Mounting energy sector liabilities, due to excess installed capacity from take-or-pay contracts with inde- pendent power producers, and the ongoing financial sector clean-up are likely to lift the debt-to-GDP ratio above the current 60.6%.
Increased foreign participation in Ghana’s debt exposes the country to global market swings and for- eign exchange risks, with nonresident participation in domestic debt at more than one-third.
Ghana Fixed Income Market (GFIM) is positioning itself to introduce more investible products on the market ( securities lending and borrowing; develop other fixed income securities such as commercial papers and municipal bonds and create indices). GFIM is collaborating with other stakeholders such as Securities and ExchangeCommission, Bank of Ghana and the Ministry of Finance to establish a domesticcredit rating agency to bring onto the market independent credit-worthy assessment of issuers who come to the market to raise money. It is the view of GFIM that introducing credit rating will deepen the market.
Ghana is 9th in the ABMDI 2017 Ranking Report.
The present value of Debt to GDP ratio and the nominal Debt to GDP ratio is projected to be below 58.5 % and 60% respectively for 2020 as per the 2020 Debt Sustainability Analysis. According to the 2020 Budget Statement and Economic Policy, the financing strategy for 2020 proposes issuances of Government securities on the domestic market and create cash buffers on top of the programmed net domestic financing for active liability management and cash management purposes. The strategy is to issue / re-open medium to long-term instruments (2-year, 3-year, 5-year, 7-year, 10-year, 15-year and 20 Year bonds) and refinance some of the maturing Treasury bills and Bonds. The strategy also plans to issue marketable and non-marketable debt against possible contingent liabilities arising from the financial and energy sectors in 2020.
On the external front, the strategy proposes the issuances on the International Capital Market provided market conditions are favourable and additional external borrowing for priority development projects, which cannot be financed on concessional terms. In line with the medium term debt strategy and consistent with the 2020 macrofiscal framework, a ceiling of up to US$3.0 billion for international capital market programme for 2020 is projected. The choice of instruments for this programme will be based on market conditions; possibility and feasibility of the issuance in 2020. These are: regular Sovereign bond; Green Bond; SDG Bonds; Syndicated loans/financing, and Sukuk bonds.
There are 6 potential benchmark maturities: 3-month, 6-month, 1, 2, 3 and 5 years. Currently only 3-month and 6-month tenor function as real benchmarks, for the others either the issue size is too small or issuance is very infrequent.
Ghana does not have a benchmark yield curve, but the Bank of Ghana and the Ministry of Finance construct a yield curve using yields from primary markets for internal purposes. With the lack of a secondary market and sporadic yield quotation on Reuters or Bloomberg, the latest auction yields are considered as a benchmark yield curve. No zero-coupon curve is regularly calculated.
Linear interpolation is used.
Yield curve managed by
The Bank of Ghana and the Ministry of Finance calculate the yield curve on a weekly basis.
Challenges in building an efficient yield curve
- Market fragmentation: the market is segmented: non-residents can only purchase 7-year and longer bonds, while domestic investors are keen only on 6-month tenor.
- Narrow investor base: the domestic institutional investor base is thin albeit growing.
- Illiquid and limited secondary market: most investors buy and hold securities.
- Lack of transparency in pricing securities in the secondary market: quotations from Reuters and Bloomberg are sporadic. However a new electronic trading platform will start soon.
- Lack of effective benchmarks: there is no benchmark issue in terms of size.
Guide to Buying Bonds
Procedures for market participation
Every Friday, the Bank of Ghana conducts an auction of T-bills on behalf of the Government and the public sector for their borrowing needs as well as for monetary policy purposes. T-Bond auctions are conducted occasionally. The auction is processed electronically using either the cut off rate or the amount government is borrowing. Following the set criteria the system automatically allots the winning bids and the cost of these bids, which become available online to participants. The announcement of the next issue as well as the amounts and instruments issued are disclosed in the publication of the results of the previous issue. Only primary dealers may participate in auctions.
On the secondary market, government bonds with a maturity of less than 2 years are traded over the counter through the primary dealers. In 2006, the 2 year and 3 year maturity bonds were quoted on the Ghana Stock Exchange (GSE). The 5-year maturity bonds were authorized for listing on the GSE in 2007.
The GSE opens on weekdays from 9:30am to 3pm. The trading system used is an electronic platform, the GSE Automated Trading System (GATS). Orders are processed on the GATS as well as from the floor, with brokers or even over a secured Internet link.
An investor cannot intervene directly in the stock market to buy government securities; they must use a broker. For foreign investors, there are 18 brokers following established procedures to cater to foreign investors. Barclays Bank of Ghana Ltd and Stanbic Bank of Ghana Ltd provide foreign investors with access to the secondary market.
On the primary market, when the allotment process is complete, each successful participant is advised of the amount to be paid to the Government on settlement day. The settlement cycle for government securities auctions therefore occurs on the basis of T+1. On the settlement date, the fund accounts of the participants are debited by their respective amounts and the securities accounts of individual investors are credited with the allotted securities. Auctions for Government Securities are held on Friday (T) and subsequently settled on Monday.
In the secondary market, DvP process is in place in Ghana for Government Securities Settlement. Securities are settled trade for trade and credited or debited directly to the account of the investor whereas funds are settled by a single transfer into the account of the participant at the Bank of Ghana. Settlement is done at the end of the settlement day. The settlement cycle for government securities market is currently T+0.
There is a withholding tax of 8% (which is also the final tax on dividend income) for all investors, residents and non-residents. Since 2010, capital gains on listed securities are exempt from tax.
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Initially, brokerage firms, banks and discount houses were the main distributors. The participation of retail banks seemed essential given their extensive networks to promote the retail government securities.
However, in March 1996, in consultation with the distributors on the market, the Bank of Ghana stopped the retail market for Treasury bills. Instead they focused on the establishment of the wholesale auction with the help of Primary dealers. The primary market could be stimulated and expanded thanks to increased competition on a more efficient and dynamic secondary market.
Openness to international investors
Attracting foreign investment is a big challenge for the Government of Ghana. The Government passed laws to encourage foreign investment and replaced regulations perceived as unfriendly to investors. The Foreign Exchange Act 2006 (Act 723) has allowed non-resident investors to invest in the Ghanaian capital markets.
There is no limit on capital transfers as long as the transferee can identify the source of capital.
Restrictions on FX and profit repatriation
Ghana operates a free-floating exchange rate regime. Ghana's local currency, the Ghana cedi, can be exchanged for Dollars and major European currencies. The Foreign Exchange Act 2006 (Act 723) has allowed non-resident investors to invest in the Ghanaian capital markets without limits or exchange controls.
Non-resident investors can repatriate their original investment plus all gains and revenues without restriction.