US embassy cable - 04ACCRA1579

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 
---------------- 
 
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 
-------------------- 
 
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 
---------- 
 
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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