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Opinions of Saturday, 23 January 2010

Columnist: Ampong, Charles Horace

Why Ghana could be the right place for foreign investors? (Part 2)

In the first part of this article, I elucidated on the policies required for the rejuvenation of the economy of Ghana with special attention to Direct Foreign Investment and Portfolio investment. In the ensuing discussion, I would continue with the policies that are required for a successful economy and job creation with particular emphasis on the impact of the country’s strong currency on DFI, Portfolio investment and some pertinent issues regarding the Ghana Stock Exchange. Also, I will commence with the discussion of the factors that are likely to determine the pricing of the oil, the magnitude of the revenue to be incurred and why there should not be much euphoria over the discovery of the oil in Ghana. However, this would take us into Part 3 of this article.

Continuing from the previous article, I would like to say that government policies should encompass diversification not only into oil, gold and tourism but all sectors namely industrial, agricultural and service. I am of the view that the agricultural and service sectors need more augmentation. Opportunities are abundant in these sectors and the government should do well to identify them. The service sector presents opportunities for value added activities as technology is fast expanding in this sector and Ghana can take advantage of it. Moreover, a diversified economy is more resilient and can endure global recessionary pressures compared to a less diversified one. Consider the case of China whose exports covers a wide spectrum of items from computers to crude oil making its economy more resilient to the global downturn. Most of China’s products are very price elastic and its low valued currency enables it to reap much revenue from it as fall in prices is accompanied by increased demand. What’s more, diversification would reduce the risk of the impact of price elasticity on the country’s exports. I am of the view that Ghana’s strong currency is expected to increase its balance of trade deficit if its traded goods are price elastic (sensitive to global price changes). A typical example is its top export Cocoa and its processed forms such as cocoa butter or paste. From international perspective, this main export has many substitutes and is likely to be price elastic if economics is applied here. In fact, the strong currency should make the price of the Cocoa and the processed forms expensive. Apparently, if there is global fall in prices possibly due to the presence of many substitutes coupled with the drop in demand, loss in revenue will be quite a lot and this will have negative impact on the balance of trade of Ghana. Next, lowering of restrictions on DFI by removing government barriers to privatization can be a good step to take. Privatization would allow for greater international business between Ghana and the world, prevent nationalization of the economy and monopoly of state-owned enterprises thereby promoting value-added corporations. The fact is that most of the corporations handled by the government lack the value-added dimension. Take the case of former Ghana Telecom. Until it was divested to Vodafone, there was serious lack of value-added activities. Vodafone has managed to bring this principle of value-added into the company which is commendable. As a matter of fact, all these have become possible because of privatization. I am not advocating for foreign invasion of the country by investors. That is tantamount to treason as a Ghanaian. However, I am an advocate for economic liberalization which culminates in trade liberalization (including liberalization of DFI and Portfolio investment), privatization of some state enterprises, deregulation, financialization of capital in the midst of better fiscal policies. I don’t believe in extreme economic liberalization which is equivalent to Neoliberalism. Ghana does not need neoliberalism but rather better fiscal and monetary policies that can promote economic liberalization. Neoliberalization is ultimate transfer of control of the economy from the public or government to the private sector.

Again, policies should also be geared towards lowering corporate tax to improve after-tax cash flow for investors as such action plan will be an incentive for DFI attraction. To the best of my knowledge, the current strength and stability of the Cedi is a plus for the country as it could be a bench-mark of decision making for serious investors. Additionally, it should attract investors into the foreign exchange investment at the Ghana Stock Exchange which would be a plus for the country’s capital account. However, our strong currency is meaningless unless other policies are in place to attract DFI and Portfolio investors into the country.

Economics analyses suggest that investors prefer to pursue DFI in countries where the local currency is expected to strengthen against that of their country of origin. In this wise, earnings from their activities in the host country can be converted back to their country’s currency at a favorable rate. In fact, this could be one of the reasons why Chinese and South African investors have flooded Ghana. There is the perception that the Yuan or rand their currency is expected to remain at its low level as against the dollar or cedi in the years ahead. Also, it is possible China would not revalue its currency in the years ahead so this condition serves them well. With regards to portfolio investment, investors would like to invest in a country where taxes on interests or dividend income from their investment are low even though returns on their investments are high. Supposedly, the high interest rate and the strong and stable currency of Ghana depict a conducive business environment for portfolio investment. If the ruling government can maintain the stable and strong currency, there is the possibility of portfolio investors flocking to Ghana to invest in stocks, bonds (government, corporate, 1 year bond, 2 year bonds e.t.c). However, if signs show they will not be able to maintain it, then expect investors not to come and even those who are already in Ghana would start to leave. Accordingly, two factors are non-trivial here. First, if the investors expect the economic conditions to be favorable in Ghana in the years ahead they would be attracted to invest in the stock market or any Eurobonds the government might be selling. Second, the investors would be interested if only they know that the cedi would strengthen over time against the dollar or the currency of their country of origin. Fortunately, the crude oil discovery presents a deceptive picture of the prospects of Ghana’s fiscal or current account balance becoming stronger in future. This in itself should be a plus for Ghana to attract investors to invest in its economy

Another fact about portfolio investment is its prevalence in a country where equity financing is favored over debt financing. Corollary, one way to enhance the status of Ghana Stock Exchange is promote equity financing in Ghana. The current situation of company ownership of shares as against individual ownership should be reviewed. Policies should be put in place that will encourage Ghanaians and foreigners alike to invest in stocks and bonds. In this way, shares ownership on Ghana Stock Exchange would not only be about company ownership but also individual investor ownership of shares. Judiciously, emphasis would be shifted from the prevailing company ownership of shares to individual ownership. In this way, companies in Ghana can raise large amounts of capital by issuing stocks, bonds. Another issue worth mentioning is investor protection not only at the stock market but also other sectors of investment presumably DFI sector. In fact, effective policies are needed here. Policies that will promote liquidity on the market such that foreign investors with holdings on Ghana Stock Exchange can easily sell their holdings of stocks locally in the local currency without any problems. Policies that would give more power to shareholders to sue publicly traded firms if their executives are caught in fraudulent deals and also ensure the enforcement of market securities laws. Meanwhile, I must commend Ghana Stock Exchange for removal of restrictions on holdings of foreigners as well as the capital gains and related earnings in 2006. Another commendation goes for the introduction of electronic trading platform for transactions of settlement trades, interactions between investors, traders and brokers on the floor. This shows the exchange has come of age but there is still room for improvement. Generally, polices that would promote more legal protection, more enforcement of security laws, less corruption and more stringent accounting requirements is likely to attract more portfolio investors to Ghana. This is because they would enhance market efficiency by stimulating confidence in the market and improving pricing efficiency. Unfortunately, these measures may be more effective in markets at least a little larger than Ghana Stock Exchange. So, I look forward to the day when African Union will be a reality so that markets across Africa can also unite to become big and efficient as it is happening in Europe and Asia. Recall in 2000, the Amsterdam, Brussels and Paris stock exchange merged to create the Euronext stock market. In 2007, NYSE joined Euronext to form the NYSE Euronext the largest global exchange. In fact, the merging of financial markets in Africa can begin with regional ones. For example there can be the formation of West African Stock Exchange which will comprise of the merging of the different financial markets in West Africa. However, for this to happen there has to be first the union of these states which I foresee happening in future. In fact, the merging of different financial markets in Africa to create a high volume large size financial market would be efficient in terms of number of investors, pricing and generation of large financial capital for companies through stock issuance. Now, until this happens small markets like Ghana Stock Exchange would continue to be in the status of limited number of investors, minimal volume of shares, minimal capital generation and less market efficiency.

Now, I read from Bloomberg news that Ghana’s dollar dominated Eurobond (with yield 8.5% and due in 2017) surged 93% in Jul 2009 and the reason given was the expected fiscal position of the country because of the oil discovery and the fact that it could serve as a gateway to other countries in Africa. At least Eurobonds is good for the country as it provides a means to attract funds without much input. A good thing about this is that Eurobonds have limited protected covenants for the issuer. With regards to the buy, it presents the ability for the bond holder to convert it into a specified number of shares of common stock.

In reality, regarding crude oil production in Ghana, there are four factors that would determine pricing in the next few years. They are

• An expected drop or increase in demand by the two world’s largest importers of crude oil namely United States and China

• Strong divestiture into Renewable energy production as against non-renewable energy

• OPEC cuts in supply of oil because of drop in demand

• More tensions in the middle East, Nigeria, South America(between Chavez & America)

I would discuss these factors in the final part of my article - that is the part 3.

Finally, all things being equal these policies and strategies should culminate in job creation in the short and long term and also help to improve the standard of living of the people of Ghana. In the final part of this article I would be discussing the global factors that are expected to determine the pricing of crude oil and the magnitude of the revenue to be expected.