Bond Markets in Ghana

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WEST AFRICN INSTITUTE FOR FINANCIAL AND ECONOMIC MANAGEMENT

REGIONAL WORKSHOP ON MONEY MARKET DEVELOPMENT AND TECHNIQUES OF SECURITIES TRADING-LAGOS, NIGERIA MARCH 4-14 2008

THE BOND MARKET IN GHANA-CHALLENGES FOR ITS DEVELOPMENT

A. Introduction
A bond has been defined as a debt (loan) instrument which requires the issuer to repay the investor the amount borrowed with interest over a predetermined period of time.

Bonds can be callable, redeemable, convertible, extendable or retractable. They may have warrants attached to them as a sweetner. They may also be income generating or have zero coupons.

Bond investors are exposed to some or all of the following risks: interest rate, reinvestment, call, default, inflation, exchange rate, liquidity and volatility.

Bonds can be issued by the government at any level or by corporate entities, local or foreign, based on an indenture (contract) contained in an offer document. Bonds differ in terms of the issuer, principal, duration, maturity period and the coupon payable.

B. Some terms in the industry
Yield: a measure of returns on investment. There are different types of yield calculations like normal (coupon) yield, yield to maturity (internal rate of return set to a zero net present value (discounted cash flow of an investment). Duration: measure of the weighted average of cash flows from an investment. A zero coupon bond of n years has a maturity of n years. Coupon bonds have lower durations than stated maturities. Convexity: measure of the sensitivity of the duration of an asset to changes in interest rate. Immunization: a strategy of positioning a portfolio of investment such that a change in interest rates will not affect the value of the portfolio. Changes in value occurring in one part of the portfolio are offset by changes in other parts of the portfolio.

C. The Ghanaian experience in the bond market
Prior to the late 1980s, the bond market in Ghana was unexciting. However recent activity of the bond market in Ghana has generated great excitement and revealed a great potential that is currently being exploited.

The Bank of Ghana (BoG), which is the central bank, has been issuing 2, 3 and 5year bonds for many years. In 1987, a bond was issued under the Financial Sector Adjustment Program (FINSAP) as part of the Non Performing Assets Recovery Trust (NPART), to remove non performing loans from distressed banks, and recapitalize or replace them with government of Ghana (GoG) bonds. This was aimed at helping such distressed banks to meet their capital adequacy requirement.

In 1994 GoG temporarily discontinued the issue of long-dated bonds in favor of 91 day and 182 day Treasury bills.

In 1990 a 26% 5year Ghana Stock Exchange (GSE) Commemorative Registered Bond was issued with a face value of ¢5billion. With a T’bill rate of 30% it took 3 years to place completely and only had a low turnover, even after the floatation of the interest rate to make it more attractive.

GoG also on-lent a 30year $8m IDA facility to the Home Finance Company (HFC) to support its mortgage activities. Commencing from 1996, HFC issued further bonds principally by shelf regulation. This has been the most significant corporate bond issue on the market from the 1990s. These HFC bonds were sweetened by being dollar-indexed.

GoG issued the Government of Ghana Index-Linked Bond (GGILB) on 7th September 2001 with secondary trading commencing on 28th December 2001. This is a three year inflation indexed bond with interest payable at Consumer Price Index (CPI) plus 6%. The objective of the issue was to restructure GoG’s domestic debt which ran at 8.5% of Gross Domestic Product (GDP) in 2000. It therefore converted the existing domestic debt stock from short to medium term duration. This brought immediate relief from short term debt servicing. It also brought a relief in the reduction of interest payments as inflation reduced considerably over the period of issue.

The...
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