WILL THE GHANA STOCK MARKET EVER SLOW DOWN?

UNCLAS ACCRA 001579

SIPDIS


E.O. 12958: N/A
TAGS: EFIN ECON GH
SUBJECT: WILL THE GHANA STOCK MARKET EVER SLOW DOWN?

Summary
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1. African stock markets are attracting greater and greater
investor attention, and the small Ghanaian bourse is one of
the fledgling markets leading the way. In 2003 the Ghana
Stock Exchange (GSE) was the best performing stock market in
the world with a return of 144 percent in dollar terms. For
the first half of 2004, the GSE is again the world's best
performing market, gaining another 92 percent. To better
understand this phenomenon, post toured the stock exchange,
met its managing director and general manager, the Chairman
of the Council of the GSE, and several of brokers and
financial sector leaders. While the GSE is growing and will
continue to provide an alternative investment opportunity,
investing in this market is not for the feint of heart. End
Summary.

Basic Statistics
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2. Only 27 companies are listed on the GSE. The number
listed has grown slowly since the GSE,s inception in 1990,
but the recent success is attracting newcomers. Several IPOs
could get listed in the second half of 2004. Low valuation
had helped fuel the recent rise in the market but the current
price-earnings ratio of 21 is quite high (compared with a
historical average of 7). There are few institutional
investors in Ghana and daily turn over is low. Officially,
the market capitalization is now around USD 10 billion, but
this figure is misleading as a very large recent issue,
Anglogold Ashanti, distorts the market. Factoring out
Anglogold, the market cap is closer to USD 2 billion (about
29 percent of GDP),compared with a capitalization of just
USD 500 million in 2000. Using the USD 2 billion figure, the
GSE is the sixth largest in sub-Saharan Africa.

Recent Strong Growth
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3. The GSE,s recent performance can be attributed to
several factors: strong corporate results, declining
inflation, falling interest rates, and an overall improvement
in the macroeconomic environment. Ken Ofori-Atta, CEO of
Databank, the major asset manager and brokerage company in
Ghana, expressed considerable optimism about the stock
exchange's strength. Ofori-Atta and the other financial
sector leaders post met were optimistic that the GoG would
maintain macroeconomic stability and that the low inflation
and low interest rate regime would continue to stimulate
business confidence. He felt that external pressures such as
the HIPC process and the credit ratings from S&P and Fitch
helped create external pressure to maintain the good
performance.


4. One sign of Ghanaian investors, interest in the GSE, is
the growth of the mutual fund business. Databank created
Ghana's first mutual fund, Epack, in 1996. Epack has enjoyed
amazing success, gaining 4,393 percent since its inception.
The number of investors interested in Epack has skyrocketed,
more than tripling from 5,000 to 18,000 in the past six
months, and the assets in the fund have increased from 75
billion to 240 billion cedis (about USD 8 million to USD 26
million) in the same period. The establishment of four
additional Ghanaian mutual funds in the past year is a
further demonstration of the rising demand for new investment
instruments in Ghana. Nearly everyone post spoke with
during attributed the GSE,s phenomenal growth in part to the
falling interest rates. Investors can no longer sit back and
only hold government T-bills as they have done in the past.
As investors diversify, they will inevitably fuel demand for
a more robust capital market structure.

Challenges
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5. Healthy development of a stock exchange in any developing
country or emerging market is always difficult and slow. The
same is true in Ghana as it suffers from many typical
"Africa-related" constraints: macroeconomic instability,
government mistrust and unpredictability towards the private
sector, and the "neighborhood phenomenon" of being located on
the same continent with much civil strife, disease and
poverty. More specific constraints on GSE,s development
include: (i) Lack of liquidity. Many investors hold their
shares and trade infrequently, so demand far outstrips
supply; (ii) With just 27 companies listed, investors cannot
easily diversify, so are exposed to potential high
volatility; (iii) While improving, the quality and
predictability of regulation is still low; (iv) Trading is
not automated. Manual trading slows down trading and
provides brokers the opportunity to interfere in smooth

transactions; and (v) An unwillingness of companies to expose
themselves to the required auditing and reporting standards
mandated by the GSE.


6. Some of the constraints are slowly being addressed. The
Council of GSE is working to press the GoG to allow shares in
SOEs to trade on the market. Accelerating the completely
stalled privatization program would provide the government an
opportunity to sell its shares in SOEs, thus simulating
private sector development. The GSE itself is aggressively
trying to convince potential companies of the opportunity.
Many financial sector leaders confirmed post's belief that
the GoG does not have a good understanding of the potential
of a strong capital market system, and are reluctant to allow
it to thrive. The regulators (the SEC) in Ghana are
improving, but are slow and it can take years to update and
modernize outdated regulations. For example, it took six
years for the GoG to allow the creation of mutual funds.
Regarding automation, the GSE has begun setting aside some
funds in hopes of affording a new software platform within
1-2 years. The GSE is also looking for external funds for
this project. (Comment: The GSE,s General Manager, Ekow
Afedzie, asked EconChief for USG assistance to automate the
exchange. There is potential here for OPIC, Exim Bank and
/or African Development Foundation. End Comment)

Comment
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7. The rocketing stock market is bound to attract many new
investors to the GSE. While this presents opportunities to
make money, the GSE remains a risky place to invest, and
there are signs of "irrational exuberance" taking place. The
current high valuation is concerning some investors, as the
market has cooled in recent weeks. Databank writes in its
2004 outlook "Speculation is rife with very little attention
given to expected return and all the emphasis on
supply/demand imbalance." The dearth of quality companies in
which to invest, the illiquid market, and the slowness and
unpredictability of the regulators all constrain the GSE,s
healthy development. However, the potential for the stock
market is there. Several years of sustained growth, combined
with lower interest rates and inflation, could contribute to
a better appreciation of the market on behalf of the GoG
policy makers. End Comment.
YATES


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