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25TH APRIL 2012




INTRODUCTION Financial markets have become vital tools for sustaining the economies of developing countries. Due to this, many developing countries have embarked on a number of financial sector development programmes since the mid 1980's in order to revamp their economies. Ghana is no exception to this new wave of development. The country has undergone a process of financial sector restructuring and transformation in order to achieve emerging financial market status. These reforms have aimed at moving the financial sector from an era characterized by controls to a market-based regime. The government of Ghana as part of its agenda for the restructuring of the financial sector, implemented monetary policy reforms leading to the creation of a market for securities.

In 1986 a weekly auction in Treasury Bills was introduced. Again in 1988 Bank of Ghana Bills were introduced to take care of excess liquidity in the system especially in the rural areas and also to provide an avenue of investment for banks. The Central Bank of Ghana has shifted gradually from a direct system of monetary controls to an indirect system that utilizes marketbased policy instruments. As part of the process, the Bank of Ghana rationalized the minimum reserve requirements for banks, introduced new financial instruments, and open market operations for liquidity management. (Bank of Ghana Consultation Paper October 2007).

The restructuring of the financial sector resulted in the creation of the financial market in Ghana. The market in Ghana is made up of the money market, the bonds market, equity market, foreign exchange market, mortgage market and the derivatives market. Unfortunately the money market dominates the financial market in Ghana, bringing with it a number of associated problems. The major participants in the money markets are the Central Bank, brokers or discount houses, corporate organizations, commercial and investment banks, other financial institutions and individual investors. The money market provides a market for the banks where they can lend when they have excess liquidity and also borrow when they are in short of liquidity.

DEFINITION AND TYPES OF BONDS Bonds are long-term debt securities, and are often referred to as fixed-income securities. This is because the debt service of the issuer is fixed. That is, the issuer agrees to pay a fixed amount of debt periodically and to pay the full amount of principal at maturity. According to R. E Bailey (2005) a bond is a contract that commits the issuer to make a definite sequence of payments until

a specific time. He further explained that bonds are special forms of loan, which is commonly an agreement between a borrower and a lender. Bonds are long term financial securities which promise its holder some future payments under certain agreed terms. These payments may be in the form of periodic interest payments(coupons) followed by the payment of the bonds face value at maturity, a onetime payment of both principal and payment at a future date. Bonds are usually issued by governments, corporations and municipalities. In Ghana, most bonds are issued by the government. No agency or municipal bonds have been issued. Some types of bonds are briefly explained as follows Ghanaian examples where applicable:

TREASURY BONDS This type of bonds is sometimes referred to as government bonds as they are issued by governments. Upon the purchase of such a bond, government promises to make payments to the holder on certain terms agreed upon before the issue. Treasury bonds are generally risk-free bonds. Government of Ghana(GoG) issued bonds can be classified under treasury bonds. CORPORATE BONDS Corporate bonds are issued by corporate entities as a means of raising funds for the furtherance of their operations. Unlike treasury bonds, corporate bonds are exposed to default risk since the issuers of the bond may be unable to pay, in case the company does not do well in its operations. The coupon rates of corporate bonds are relatively higher than that of treasury/government bonds due to the credit risk they come with. An example of corporate bond in Ghana is the HFC dollar Housing Bond Series and the listing of Standard Chartered Bank's three year Medium Term Notes which was worth 350billion. FOREIGN BONDS These are bonds issued by foreign governments and corporations. Such bonds have some element of credit risk particularly with respect to those issued by foreign corporations. EURO BONDS Euro bonds are bonds which are issued outside the shores of the issuing country and denominated in a foreign currency. Ghana issued its first Euro bonds in 2007 and raised $700m. MUNICIPAL BONDS These bonds are issued by municipal authorities to raise funds for the finance of their activities. The issue of municipal bonds is subject to approval by the central government after thorough investigations into the activities of the municipal authority in question and obtained guarantee of its ability to make payments as and when they fall due. A municipal bond is yet to be issued in Ghana.

Throughout the developed world (Europe, Japan, Canada, USA, etc), bonds play significant role in financial markets. They provides important source of long term borrowing for governments and corporations. In recent times however, governments of developing countries are beginning to turn to the issuance of bonds as a means of raising medium and long term funds to finance various government projects. According to an IMF working paper of 2009, the financial markets in most sub-Saharan African (SSA) countries are shallow, and have inadequate access to finance. As a result, mobilization of domestic resources as an alternative source of financing is becoming increasingly important in SSA, with SSA governments focusing on domestic markets in order to avoid renewed or unsustainable external indebtedness. Easy access to concessional financing had reduced the need to develop domestic bond markets in many SSA countries. Prior to the ongoing financial crisis, many SSA countries enjoyed relatively simple access to external donor funds, predominantly in the form of multilateral and bilateral loans and grants secured on concessional terms. Despite a long history of fiscal deficits and a growing need for developmental and structural investments, with the one exception of South Africa, bond markets in SSA have remained shallow, illiquid, and inefficient.

The paper further provided that, as the global financial crisis persists, concerns have emerged that donors funds may turn out to be scarcer and therefore having sufficiently liquid domestic bond markets is becoming increasingly important. In the wake of the global financial crisis, the need for the development of domestic and regional bond markets, as part of the response to the crisis, becomes more discernible. This is based on the view that there has been over-reliance on the banking sector for funding, with many banks being subsidiaries of foreign banks with the attendant contagion effects. The financial sector of many SSA countries is vulnerable to swings in global market sentiment and foreign investors risk aversion. The development of the domestic bond market will improve financial intermediation and help to channel more funds into domestic investment and, therefore, finance development needs.


HISTORY OF GHANAS BOND MARKET Ghana has over the years relied on concessionary debt from multilateral sources especially the International Monetary Fund(IMF) and the World Bank and have had to live with the antecedent challenges of such concessionary debts which include long gestation periods where disbursements take up to three(3) years which result in adverse economic costs. Approved amounts may also be inadequate to undertake earmarked projects to accelerate growth. Conditionalities attached to the debts not being consistent with national priorities have also posed problems and high transaction cost appraisal, review missions, monitoring and

evaluation tying up significant national resources, resulted in government coming to terms with need to diversify funding sources to mitigate disadvantages of concessional debt.

Reforms undertaken over the last decade have transformed Ghanas economic condition and prospects. Ghanas stable political conditions needed for reforms to succeed and support from international partners have reinforced the positive steps taken at home. Macroeconomic and social indicators are also pointing in a positive direction. Vulnerabilities remain but the strategy is in place and the foundation has been laid for Ghanas ascent to middle income status by 2015. The above conditions coupled with the listing of Governments 2, 3, and 5 year bonds have sent positive signals of an emerging bond market in Ghana. Currently, the issues of Government of Ghana bonds have been over-subscribed and this signals an interest in fixed income securities. Ghanas average domestic debt ratio has increased from 16% of GDP between 1990-2000 and 24% between 2001-2008. The Bank of Ghana recently returned more than GH400m in surplus of its oversubscribed three-year bond. This is because the governments three year bond, which was to raise GH200m was hugely oversubscribed as the Bank received GH639m in bids. These bids were from both local and international investors. According to the Head of Treasury, Mr Adams Nyinaku GH169m worth of accepted bids were from offshore investors. (Graphic 27/02/12 P.53).

A GSE report of 2007 described the year as the golden year for Ghana's capital market including the Ghana Stock Exchange. According to GSE reports Market Capitalization shot up by 22.38% to close 2006 at 112,415.68 billion from a previous value of 91,857.28 billion in 2005. Volume and value of shares traded were 98.29 million shares and 476 billion respectively as against 81.40 million shares valued at 464 billion recorded in 2005. Trading in listed bonds recorded values of 1.6 billion compared to 0.1billion in 2005. The report went on to say that in 2007 secondary trading on the floor of the Exchange saw, a tremendous improvement over the recent past where secondary market trading of government securities, which were done over-thecounter through a network of primary dealers, saw a tremendous improvement. The volume of shares traded rose by 193% from 98million in 2006 to 287million in 2007, the value of total shares traded rose from GH47.60million to GH140.71million. Also as of March 2007, the GSE had some 32 listed companies, with a market capitalization of approximately GHC 112 trillion (USD 12 bn).

In 2008, the Golden Jubilee Savings Bond, a 5 year Government of Ghana bond was issued in commemoration of the Golden Jubilee Celebration of Ghana. The bonds were being issued to encourage long-term savings and investment among Ghanaians. The Jubilee Bond was an obligation of the Government of Ghana (GoG). The subscription period for the Golden Jubilee Bond had to be extended from March 5, 2008 to June 30, 2008 due to "the significant interest

shown by Ghanaians in the Diaspora and their overwhelming request for the subscription to be extended". The main objectives of the issue of the Golden Jubilee Savings Bond were to: i. ii. iii. iv. Raise GH50 million to embark on infrastructural development in every region in Ghana. Enable as many Ghanaians to commemorate Ghanas Golden Jubilee Celebration Create awareness of the importance of saving Diversify the financial instruments on offer to the market

The Golden Jubilee Bond was a retail savings bond which was purchased from an approved list of financial institutions all over the Country. It was an Accrual Bond with no interest paid until redemption. The Bond was also intended to promote savings culture among Ghanaians that would support the significantly higher levels of investment to propel the country into middleincome status by 2015. The bond was designed to achieve other important objectives such as broadening the participation of Ghanaians in the formal financial system and promoting long term savings and investment culture in Ghana.

Ghanas bond market is expected to be deepened by move by government to set up a national Bond Market Committee. The committee will among other things identify the constraints in the development of corporate bond market, study and recommend legal, institutional and process changes needed to accelerate the development of a corporate bond market. The committee will also monitor the performance of the government bond market and to improve its effectiveness as an anchor for the corporate bond market as Ghanas bond market is currently dominated by government bonds.

Ghana sold its first global bond in 2007 going into the record books as the first country in Sub Sahara Africa to issue and global bond, raising $700 million to help fund the construction of roads and power plants. After that, the budget deficit surged to 24 percent of gross domestic product in 2008 and the global credit crisis sent the currency plunging 49 percent against the dollar in the year through June 2009, pushing inflation to 20.7 percent that month. In addition to government bonds, HFC and SCB have issued and listed corporate bonds on the market. The World Bank Groups International Finance Corporation (IFC) on January 18, 2012 obtained approval from Ghana and the eight member countries of the West African Monetary Union to establish local currency bond programs to strengthen domestic capital markets and support private sector development in the region. The approvals were to enable IFC to issue over $1


billion equivalent in bonds in Ghanaian cedis and CFA francs over the next 10 years, said the private arm of the World Bank Group. The bonds will be sold in their respective markets to domestic and foreign institutional investors, it added as proceeds will fund IFC projects that support private sector development in key areas such as infrastructure and access to finance for small and medium enterprises. By Ekow Quandzie(Ghana Business News) it was revealed that foreigners took the chunk of the offer. Despite these, the secondary bond market however, still remains dormant. The steady rise in investor confidence in the economy is lending support for increasing liquidity within the bonds market, giving fresh hope for long-lasting decline in interest rates. Results from the second issue of the Government of Ghana three-year fixed rate bond has shown that there has been another over-subscription this time to the tune of 130 percent, for the offer that lasted for just a day. Against an offer of GH300 million, total subscriptions received were GH690 million. During the week-long offer for the first issue which closed on January 14, 2010, the offer of GH200 million was oversubscribed by 97.7 percent for which GH310.89 million was allotted, representing 55.4 percent more than the target. Appendix B gives an overview of some GoG issued bonds, their subscriptions and yields.

The overwhelming response coupled with the interest expressed by foreign investors in the first issue, the Treasury Department of the Bank of Ghana (BoG) observed that investor confidence was being restored in the economy, especially in comparison to a year earlier. On this second issue, the Treasury Department has said that investor confidence is paving the way for liquidity in the bonds market. The offer which was issued to yield 14.97 percent attracted bids, ranging between 12% and 19%, from both local and foreign subscribers. For the relatively low bids received, officials of the Treasury Department explained that it was an indication of the much more liquid bonds market now, as compared to previous years.

The IFC Vice President and Treasurer, Jingdong Hua, provided that Deep and liquid local currency bond markets are indispensable in providing diversified long term funding sources for private sector companies, including SMEs. The agreements with the government and regulator of Ghana and the West African CFA countries will enable us to support the development of these markets. They also allow us to help our private sector clients mitigate foreign-exchange risk, so that they can grow their businesses and contribute to job creation and growth in Africa.

Ghana is making a fresh bid to develop a corporate bond market and aims to achieve five listings in the next three years, an adviser to a new government bond development panel told Reuters on

Thursday, 1st of March 2012. Ghana's bond market is dominated by short-term government securities and long-term funding is needed to drive investment in the world's second biggest cocoa grower and Africa's newest oil producer. Currently, only one corporate bond, issued by HFC Bank, is listed on the Ghana stock exchange. Regulators say the absence of credit rating agencies and companies' reliance on bank loans have stalled corporate bond issuance. The National Bond Market Committee will work with stateowned enterprises and the private sector to encourage them to issue bonds, said Dr. Sam Mensah, a technical adviser to the panel. Companies have traditionally relied on bank loans and the tougher requirements for issuing bonds have been a deterrent, Adu Anane Antwi, director general of the Securities and Exchange Commission, has said. According to him, it will take time before people will buy into the idea of coming to the market and added that people would be interested in looking at how businesses are being operated, resulting in corporate governance, disclosure, transparency issues.


One remarkable achievement of the financial sector restructuring has been the creation and growth of the bonds market in Ghana. The bond market in Ghana, though could be said to be in its early formative years unlike the equity market which started with the setting up of the Ghana Stock Exchange in 1990 - has shown a tremendous improvement since the first trading of Ghana Stock Exchange Commemorative Registered Stock of 1990. Government bonds have been used as debt instruments to provide a foundation for active trading on Ghana Stock Exchange. Corporate bonds such as that issued by HFC have contributed to a promote the growth of Ghanas bond market. The government's aim of developing the bond market in Ghana cannot be over emphasized. Every attempt was made to sustain the market. In recent times the government has inundated the market with forty-eight, 2, 3 & 5-year bonds worth a little over GH1 billion. This acts as boost to the primary market and was described by the GSE as 'a significant landmark in the history of the Exchange'. The government's listings enhanced the bond market in Ghana and also showed the government's commitment to the development of the bond market. As of December 2006, total outstanding government bonds stood at GHC 2,400 bn (USD 260 million). Another major boost to the market was the listing of Standard Chartered Bank's three year Medium Term Notes worth 350billion as well as preference Shares. The introduction of government of Ghana's golden Jubilee bond in 2008 also signified a major transformation in the financial markets as well. This 5-year bond was listed in a bid to enhance


the secondary trading on the market and to ensure liquidity. This has been viewed as a positive development in the market. (Bank of Ghana Consultation Paper October 2007) Finally one other major boost to the bond market is the issuing in October 2006 of cedi dominated Africa Development Bank (AfDB) Bond. This was a two year bond linked to the Ghanaian cedi and it was worth 414.9 billion. The AfDB is reported to have plans of issuing cedi denominated bonds on the Ghanaian market. The purpose of this issue is to provide longterm local currency financing to support development projects. According to AfDB report this would be done by the means of direct project lending as well as lines of credits to financial institutions. Such a transaction simultaneously aims to deepen the bond market in Ghana. (Africa Development Bank (AfDB) report 2007).

WAYS FORWARD FOR DEVELOPING AN ACTIVE BONDS MARKET Broadening the Database Improve and centralized reporting of all bond transactions reporting to improve transparency and improve on liquidity of bond markets. Supporting regional initiatives for diversifying bond markets and providing infrastructure such as bond trading platforms, settlement and custody systems and trading systems Taxation policy Taxation of financial instruments has significant implications for financial market development. Taxes on capital gains and income from securities affect saving and investment decisions, demand for financial assets, and investment. Considering the importance of financial markets in the development of the national economy, it will be important to adopt tax policies that are compatible with financial market development while not seriously compromising principles of good taxation. This may provide a level playing field for both institutional and retail investors on the market. Already the on-going Pension Reforms has incorporated various tax incentives to retirement savings plans. For instance, total payroll tax exemptions are capped at 35% for all contributions into all the pension schemes. Corporate awareness There may also be the need to further diversify range of instruments on the bond market by creating corporate awareness to use bonds as alternatives for long awareness long-term financing. These would include improved corporate governance, disclosure and accounting

standards. Finally, there needs to be a strong regulatory framework to drive operations on the secondary bond market and increase transparency in bond trading to develop a benchmark yield curve. Sustaining policy reforms Macroeconomic reforms focusing on stability which fosters long term capital market activity. Ensuring that bond issues will be consistent with sustainable debt levels.

CONCLUSION Though the participation of government in Ghanas financial market has been substantial and encouraging, it is regrettable it has t not resulted in substantial strides, particularly in the bond market. The sound political environment, as well as the favorable macroeconomic achievements over the last decade has contributed immensely toward the development of confidence in the economy by both local and foreign investors. It is encouraging that issued bonds have lately been oversubscribed by domestic and foreign investors, with foreign investors taking a chunk of these issues but the issue of such bonds solely by government does not seem to be helpful enough for further extending the frontiers of the bond market. Regulators say the absence of credit rating agencies and companies' reliance on bank loans have stalled corporate bond issuance. Currently, only one corporate bond, issued by HFC Bank, is listed on the Ghana stock exchange. This is mainly associated with the risk inherent in corporate bonds. To enhance and encourage such bonds, the activities of industry regulators and monitors must be stepped up to meet international standards. Corporate organizations must also be willing and able to demonstrate prudent financial and operational practices that would render credibility to its existence and instill confidence in existing and prospective stakeholders. Companies have traditionally relied on bank loans, and the tougher requirements for issuing bonds have been a deterrent. Governments and regulators of financial markets have been very skeptical and cautious in granting certain approvals for raising funds, especially through the issue of bond due to the rippling effect that these issues may have on the country involved. Most local corporate entities have also been adamant in making moves to venture into raising capital through the issue of bonds for numerous reasons including the reluctance to disclose vital and sometimes unfavorable information. The IMF working paper prepared by O. Janet Adelegan and Bozena Radzewicz-Bak in September, 2009, empirically analyze the determinants of bond market development in a cross section of 23 sub-Saharan African (SSA) countries between 1990 and 2008. The study found that the savings constraint is a key impediment to domestic bond markets development as well as financial market deepening, as it results in a low level of financial intermediation by the banks. Overall, the results show that a confluence of factors matters for the development of domestic
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bond markets in SSA; these include structure of the economy, investment profile, law and order, size of the banking sector, the level of economic development, and various macroeconomic factors. Policy implications include: increased efforts to strengthen the investment environment and the need for a regional approach to bond market development. APPENDICES: A.


Government Corporate SCB Medium-Term Years Bonds(GHCMillions) Bonds(US$million) Notes(GHCMillion) 1991 0.5 1992 0.5 1993 0.5 1994 0.5 1995 1996 22.5 1997 4.8 1998 6.8 1999 9.5 2000 11.01 2001 100.37 10.2 2002 132.69 10.98 2003 144.24 8.98 2004 51.63 6.28 2005 22.5 8.78 2006 326.15 2.5 2007 1,333.07 6.4 35 Source: Conference on bond markets in emerging market economies, Frankfurt, Germany Presentation by Dr. Ernest Addison, Director of research, Bank of Ghana.

B Auction GHC200m GHC300m GHC400m GHC200m Subscription GHC639m GHC448m GHC753.7m GHC395.39 Issue GHC219m GHC301m GHC401.2m GHC310.89 Yield 14.99% 14.25% 13.45% 19%

Source: Bank of Ghana website

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References 1. Bank of Ghana Consultation Paper October 2007 2. Bank of Ghana Website 3. Brigham E.F., Gapenski L. C., Ehrhardt M.C.: Financial Management Theory and Practice(The Dryden Press) 4. Ghana Business News 5. Ghana Stock Exchange Reports 6. Janet Adelegan O. J and Bozena R. B IMF Working Paper, September, 2009. 7. The Business and Financial Times News Paper 8. The Daily Graphic

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