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Ghana: not a slam dunk, but worth a look

Cornelis Vlooswijk, Portfolio Manager, Emerging Markets, Robeco
Oct. 4, 2017, 9:03 p.m.

Word count: 1085

Most Africa and frontier funds have a very limited part of their portfolio invested in Ghana and for emerging markets funds Ghana is apparently a no-go area. This is understandable as no or very few Ghana-listed stocks meet the minimum liquidity thresholds of these funds. And with hindsight ignoring Ghana has worked well for frontier investors, especially in the 2014-2016 period. In 2017, Ghana has performed very well boosted by optimism regarding the new president and a normalization of interest rates. We believe it can run further as lower interest rates make equities more attractive for local investors. In the long run there could also be a rerating when more international investors buy into Ghana, but it is difficult to predict when that would happen.

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Most Africa and frontier funds have a very limited part of their portfolio invested in Ghana and for emerging markets funds Ghana is apparently a no-go area. This is understandable as no or very few Ghana-listed stocks meet the minimum liquidity thresholds of these funds. And with hindsight ignoring Ghana has worked well for frontier investors, especially in the 2014-2016 period. In 2017, Ghana has performed very well boosted by optimism regarding the new president and a normalization of interest rates. We believe it can run further as lower interest rates make equities more attractive for local investors. In the long run there could also be a rerating when more international investors buy into Ghana, but it is difficult to predict when that would happen.

 

Stable country with at times very high growth

Ghana’s GDP growth pace has varied over the years, but one can conclude that growth has been high overall. Like many other African countries it has profited from efficiency gains from a very low base. In the 2010-2012 period growth was extremely high because of a sharp increase in oil production. In the 2014-2016 period the economy grew by “only” 4% per year as the country faced the consequences of economic mismanagement (see next paragraph). Unlike some other African countries Ghana avoided recession. The outlook for this year and the years ahead is good as inflation and interest rates are coming down. Importantly Ghana is one of the more stable African countries in terms of social and political risk. In such an environment well-placed infrastructure investments can reduce inefficiencies and push growth up to 6% or even more.

Normalizing after economic mismanagement

The previous government has done a very poor job on economics. In the 2012-2014 period government spending ran out of control. This was because of pre-election spending in 2012, further worsened by insane, unfair and unproductive salary increases for civil servants in 2013 and 2014. This led to inflation running up from around 9% in 2012 to 17% end 2014 and a big depreciation of the currency. The latter made imports more expensive and that caused a second leg up for inflation to even 19% in the first months of 2016. The previous government was not brave enough to implement sound (but unpopular) economic policies, but fortunately they were wise enough to call in the help of the International Monetary Fund (IMF). In April 2015 the IMF provided a financial support package in return for fiscal discipline. This agreement has broadly worked well and it caused the currency to stabilize and inflation to come down in 2016 and 2017. The latter is very important for the equity market as interest rates had been pushed up because of high inflation. Many local investors had lost interest in local equities as they could already receive a very high yield on government bonds. With interest rates now coming down we can expect more local investors to increase their equities holdings and that should provide a tailwind for share prices.

 

New president: still has to prove himself

In December 2016, Akufo-Addo was elected president on a business-friendly campaign. He stated he aims to let the private sector flourish and create jobs, while reducing useless spending by the government and corruption. That sounds very good, but the proof will be in the pudding. In March the president came under fire for creating an “elephant size” government. He appointed 50 deputy ministers and four ministers of state in addition to the existing 56 roles. This does not automatically mean that useless spending will increase, but it is a very negative signal. Investors need to monitor government spending and the fiscal deficit closely. The charts below show the historical development of the budget deficit and government debt as well as the expectations of the IMF for the next five years. If Ghana can meet these expectations we can expect a stable currency (in interest rate parity terms), lower interest rates and good returns for both bond and equity investors. 

 

 

 

 

Valuation: banks look cheap, some other stocks less so

Most Ghanaian stocks have rallied this year with the MSCI Ghana up 73% and the Ghana Stock Exchange Composite Index up 37% YTD. Well-run consumer companies likely to profit from long-term demand growth are not cheap anymore. The banks also participated in the rally, but various banks are still trading at low valuation multiples: around or below book value and at 4 or 5 times earnings. This reflects some difficulties with loans in the energy and commerce sectors, but we believe the banks will have to take only limited impairments as the government has stepped in to solve the problem.

 

 

 

Lack of liquidity: joint effort on fees and taxes needed to break the gridlock

Ghana is not included in the MSCI Frontier index (and hence MSCI EFM Africa index) while countries like Kenya, Mauritius, Morocco, Nigeria and Tunisia are included. This is because Ghanaian stocks do not meet the minimum trading liquidity threshold. Trading volume in Ghana has been low for years. Even in the biggest stocks there is hardly any volume on more than half of the days. One of the reasons is that transaction costs are very high. This is a chicken-and-egg situation. Stock brokers and the stock exchange charge high fees because they would be lossmaking if they would charge less and trading volumes stay the same. We believe the gridlock should be broken and the most logical way would be a joint effort of the stock exchange, stock brokers and the government to reduce fees and taxes. There is no guarantee for success, but it is highly likely that lower transaction costs would cause an increase in transactions by parties who already regularly trade. This could be followed by a second-round effect with foreign investors entering the market because they see better volumes and reasonable transaction costs. These better volumes and potentially some rerating could make Ghana meet the size and liquidity thresholds of MSCI and other index providers. Inclusion in the MSCI Frontier would be a third round effect and would normally trigger a further rerating. This may sound like a dream, but it is worth trying as it could be beneficial for all parties involved in Ghana’s stock market.

 

 

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