Falling interest rates, deeper capital market In the second part of our three - part guide to Ghana’s economy, financial markets and productive sector activity in 2020, TOMA IMIRHE & JOSHUA W. AMLANU examine the prospects for the country’s money, capital and foreign exchange markets as monetary easing and increased liquidity come up against the customary election year jitters.

This year, a cautious resumption of monetary easing is on the cards, ahead of general elections in December, with the aim of giving slowing economic growth a boost by increasing liquidity in the economy and reducing the cost of borrowing. Although there are political considerations involved in this – the manner in which the current top tier executive management of the Bank of Ghana replaced their predecessors following the assumption of office of the President Nana Akufo Addo assumption in 2017 has put paid to any illusions that the central bank is fully independent of the executive arm of government as established by law – the economics of Ghana’s current circumstances support monetary easing too.

Inflation by the end of 2019 was 7.9 percent which is lower than both government’s end of year target and the median of the BoG’s target band of eight percent plus or minus two percent. The cedi has been relatively stable since recovering from its world-beating rate of depreciation during the first ten weeks of last year, and indeed actually appreciated marginally against the United States dollar during the end of year festivities, in stark contrast to its traditional tendency to depreciate significantly because of demand for foreign exchange to fund the customary year end rise in  imports to meet  the seasonal spike in consumerism.

Furthermore, economic growth has slowed for two consecutive years after jumping sharply in 2017 -year on year growth by the third quarter of last year had fallen to 5.4 percent, well below both the 8.5 percent achieved in 2017 and the 7.0 percent targeted for 2019. Although the BoG claims to be an inflation targeting central bank, in actual fact, economic growth considerations are given the same quantitative weight as inflation targeting in the setting of its benchmark Monetary Policy Rate every two months.

Importantly, the decision by the America’s Federal Reserve Bank not to raise its key Federal Funds Rate – currently 1.6  percent – means monetary easing in Ghana should not lead to an exit stampede by foreign portfolio investors from government’s medium and long term cedi denominated domestic debt securities. This is a crucial consideration since the most recent cut in the MPR, by 100 basis points down to 16.0 percent a year ago, led to such heavy disinvestment by foreign portfolio investors, resulting in sharp cedi depreciation and ultimately a financing crisis for government. This was because the MPR cut was made at a time the          US Fed was tightening its own monetary policy stance, thus increasing interest rates in America just as the BoG was lowering rates in Ghana.

The Economist Intelligence Unit has predicted a cut in the BoG’s MPR by the last week in January, further heightening expectations by heavily credit dependent corporate Ghana that interest rates are about to be guided downwards for the first time since this time last year. Indeed expectations have shifted from whether or not the MPR will be cut, to the extent of the impending cut with predictions ranging from 50 basis points to 100 basis points which would leave the benchmark rate at either 15.5 percent or 15.0 percent as the case may be.

But corporate Ghana may be getting ahead of itself – the BoG has been very cautious about monetary easing over the past one year and indeed the International Monetary Fund is recommending readiness to actually go the other way – towards monetary tightening – in order to ameliorate the effects of any fiscal deficit overrun by government during the run up to the 2020 general elections as has usually been the case in election years.

The IMF will not get that particular wish though – BoG Governor, Dr Ernest Addison has publicly declared his confidence that government will keep within its self-imposed 5.0 percent of Gross Domestic Product fiscal deficit ceiling this year and thus does not expect the need to tighten monetary policy in response to fiscal pressures.

Nevertheless, the central bank will be very cautious in its monetary easing – possibly implementing two consecutive 50 basis point reductions in the MPR rather than one 100 basis points cut.

Besides this, the BoG will prudently try to get short term interest rates to fall faster than medium and long term interest rates (indeed the latter may be kept where they are now), thus steepening Ghana’s yield curve.

Actually, this is a strategy introduced by the BoG last year. It aims at lowering borrowing costs for local private enterprise, which mainly borrows short term because of the dearth of long term deposits to prudently finance long term loans; while keeping medium and long term rates high enough to retain the patronage of foreign portfolio investors who subscribe to more than 80 percent of the government debt securities issued over such tenors.

This is prudent strategy and importantly, local enterprises in Ghana that issue medium term corporate bonds on the stock market to finance their activities, such as Letshego, Bayport and Ishwe, (all of them being savings and loans companies) have already adjusted to the higher medium term interest rates they have had to offer on their corporate bond issues over the past year and a half. Thus a steepening of Ghana’s yield curve through lower short term rates but stable medium/long term rates will enable local private enterprise to borrow more cheaply, but at the same time retain yields on medium and long term government and corporate debt issuances that are high enough to keep foreign portfolio investors happy.

However, deposit rates will not fall commensurately, because financial intermediation firms are already having to cope with slower industry-wide deposit growth than at any other time over the past decade. Banking industry deposits only grew by some 17.1 percent, year on year up to October 2019, according to the latest data from the BoG, compared with 20.7 percent during the previous year. With the recent melt downs in both the savings and loans and the microfinance industries making investors more conservative as to where they keep their monies, safety has become as important as offered yields, but the smaller banks and non-bank financial intermediaries in particular are having to fight harder than ever before to attract sufficient deposits with which to generate profits that justify the significant increases in capital put up by their shareholders under recent recapitalization programmes insisted on by the BoG.

Competition for deposits will be intensified this year because of the commencement of deposit insurance; because only retail deposits will be guaranteed under the scheme, with relatively low caps, many astute depositors will opt to spread their monies across several different institutions, in order to stay  within the cap in each institution so that effectively, all, their deposits will be insured. This creates the potential for a more level playing field than ever before among deposit taking financial institutions but this will be underpinned by fiercer competition for deposits as well, with offered yields being the major competitive tool employed.

Competition will also intensify in the financial services industry along the lines of service quality and product innovation as well. Here digitization will be the biggest driving force.

Already all the banks in Ghana have deployed digital apps that offer lots of unprecedented convenience for customers with regards to providing payment platforms, as a way of attracting relatively cheap deposits. Other genres of financial intermediaries are now enthusiastically following suit, this being made possible by partnering the growing number of financial technology firms that design and distribute digital products and services on their behalf.  This trend will intensify further this year.

Government’s plans to issue yet another US$3 billion Eurobond relatively early in the year aims to relieve pressure on the domestic money market from its own financing needs, thus making more loanable funds available to needy private enterprises and households. But the banks themselves are proving more comfortable investing in what cedi denominated government debt securities are available than in lending to the private sector, despite the considerably wider interest margins derived from the latter. How monetary easing and consequent lower yields on government securities and lending rates on private sector lending will play out is yet to be seen.

Stock Market

Based on trend analysis, it is expected that the Ghana Stock Exchange should rebound this year, an election year, after ending 2019 with a woeful performance returning about -12.25% with a market capitalization of GHc 56,791.28 million.

Investopedia defines trend analysis as a technique used in technical analysis that attempts to predict the future stock price movements based on observed data trend. This is based on the idea that events in the past gives traders an idea of what will happen in the future.

Given that, the GSE has followed a particular pattern in election years of which 2020 may not be different. The markets biggest return was in 2004 when it returned 91.33 percent followed by 2008 and then 2012 returning 58.06 percent and 23.81 percent respectively, all of these being election years. However1992 and 2016 were odd, as the market returned -3.63 percent and -15.33 percent respectively which means expectations of a bull market this year based on similar trends in the past are not cast in iron.

Fundamental reasons could be attributed to these returns aside the fact that they were election years. The stock exchange thrives on good financial performance of the listed companies which emanates mainly from stable macro-economic factors.

The 2016 woeful performance was attributed to high inflation, high interest rate, unstable exchange rate, power crises, among others mainly emanating from preceding years.

It is anticipated that the stock market can only rebound when the banking crises is entirely resolved and when locked up funds are adequately released to beneficiaries.

A major policy for 2020 will be the development of a harmonised primary dealer manual to guide the markets. Government also intends to promote Bond Specialists to support the development of the domestic market.

Ghana Fixed Income Market

In 2020, the Fixed Income Market should expect more investible products. This was indicated in 2020 budget that the Ghana Fixed Income Market (GFIM) is positioning itself for this course.

GFIM has tasked itself to promote the corporate bond market in order for corporate institutions to use the market to raise funds to expand their operations which may lead to increased production and create more jobs for the labour market.

In addition, government would continue to use the market to raise funds to finance the national budgets and to develop infrastructure.

Again, GFIM will introduce securities lending and borrowing; develop other fixed income securities such as commercial papers and municipal bonds and create indices for the market.

GFIM is collaborating with other stakeholders such as Securities and Exchange Commission, Bank of Ghana and the Ministry of Finance to establish a domestic credit 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 ratings will deepen the market especially the corporate bond sector of the market.

GFIM will also engage in investor and public education about the safeness of this platform for investment and the need for investing public to avoid risky investment schemes that promise unrealistic returns.

Forex Market

For 2020, the Bank of Ghana is planning to auction a total of US$ 715 million in foreign exchange on the forward market, as this would aid in curbing the effect of speculative activities on the foreign exchange (FX) market.

This will be in accordance with the Foreign Exchange Forward Auction Guidelines issued in September 2019.

Based on the auction guidelines, all Authorized Foreign Exchange Dealer Banks shall also comply with the provisions of the Code of Conduct for the Interbank Foreign Exchange market in Ghana.

The central bank expects that the maximum bids to be submitted shall not exceed three bids per authorized dealer banks.

Successful banks will be expected to provide the required Cedis on trade date in the case where they are buying a forward contract.  Allowable spread between bid and offer for banks’ clients shall be 25 pips/0.0025 Cedis.

Further to this, all bids are expected to be backed by customer demand and documentation which shall be submitted to the Director of Financial Markets Department of BoG in 24 hours after release of the auction results.

The central bank will continue to sell the USD to the banks at the mid-rate on the condition that these banks would also sell at the same rate at which it has been received. In effect, the banks are receiving US dollars to finance operations but cannot add on to the price in any way that would cause the rates spiral.

Due to the foreign exchange risks associated with exposure to offshore investors, Government in close coordination with the Bank of Ghana will undertake periodic bond buyback operations to ensure orderly redemption of domestic debt held by foreign investors. This will help mitigate the unintended consequences of occasional outflow surges of foreign capital and its impact on the domestic currency.

The implementation of the floor price and premium price for Ghana’s cocoa on the global market, as well as inflow from the cocoa syndicated loan, is expected to further bolster inflows of foreign exchange this year. These should improve the Net Foreign Assets (NFA) of the central bank, and the foreign reserves position to support the forex market thus steadying the exchange rate.

In the 2020 budget, the expected growth in the central bank’s NFA would have to be supported by monetization of the foreign currency inflows. This is projected, together with increased deposit mobilization, to instigate growth in Reserve Money (RM) and other monetary aggregates (M1, M2 and M2+), and exert upward pressure on inflation beyond the medium-term horizon. But importantly, not this year, which is strictly a short term horizon.

International Capital Market Issuance

In line with our medium-term debt strategy and consistent with the 2020 macro fiscal framework, government will do yet another major Eurobond issuance, of up to US$ 3.0 billion for its international capital market programme for 2020.

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.

The use of proceeds would be to finance growth and growth-oriented expenditures in the budget; interventions to reduce expenditures in the budget; and liability management.