Attractive Bond Yields In Ghana

The Ghanaian economy in recent years has witnessed a tremendous growth in its Capital Market bolstered by an influx of foreign investors and a robust and strong Capital Market structure. The High growth trajectory since the last 5 years has consistently placed Ghana among Africa’s Top 5 fastest-growing economies. The economy proved resilient to the adverse global effects of the pandemic after Government attempted to mitigate the pandemic’s impact on households and businesses by enacting the Coronavirus Alleviation Plan (CAP) and the medium-term COVID-19 Alleviation and Revitalization of Enterprises Support (CARES) program in mid-2020. Consequently; Ghana’s economy showed early signs of recovery in the second half of 2020 as business sentiments improved significantly translating to a projected GDP growth of 4.2% in 2021 and 4.5% in 2022. In a bid to support its 2021 budget, Government made a successful debut into the international debt capital markets securing $3 billion from an oversubscribed bond book value of $6 billion further illustrating investors renewed confidence in the Ghanaian economy and its managers.

What are Government Bonds?

Bonds are issued by governments, companies and other bodies seeking to raise capital or funds from the public. Bond Purchase literally means lending money to the bond issuer. This implies that, the reward for lending money is to receive a steady stream of payments (also known as interest payments or coupons) at periodic intervals throughout the tenure or the lifetime of the bond. This amount received (interest payments or coupons) is expressed as a percentage of the face value (the original money lent). At the end of the bond’s tenure or lifetime, the lender then receives a 100 percent of the bond’s face value. Governments bonds can be further categorized into short, medium and long term, spanning from 91-Day Treasury bills to 40-year bonds.

In Ghana, Commercial banks dominate the financial system and given their relatively large size compared with other segments of the financial sector as well as the role that they play as market makers, they remain the largest group of investors for government papers, including government bonds. Nevertheless, over the last few years, assets of nonbank institutions (particularly pension funds) and High Net Worth Individuals (HNWI) have started to grow rapidly at a pace exceeding growth in banking sector assets.

Why are Ghana bonds very attractive now?

Ghana forms part of a broader Financial market economy known as Emerging Markets (EM). An emerging market economy is the economy of a developing nation that is becoming more engaged with global markets as it grows. Countries classified as emerging market economies are those with some, but not all, of the characteristics of a developed market. As an emerging market economy progresses it typically becomes more integrated with the global economy, as shown by increased liquidity in local debt and equity markets, increased trade volume and foreign direct investment, and the domestic development of modern financial and regulatory institutions.

Ghana together with other emerging market economies were in a generally good shape post the COVID-19 pandemic, and the fiscal and monetary responses from the leaders of a number of emerging market countries represent a symbol of good progress. As a result of the pandemic, Central banks across the globe have made emergency interest-rate cuts to near zero, leaving some fixed income investors hungry for yield. While there is a lot of uncertainty in the current environment and risk-aversion is likely to continue for a while longer, investor base for emerging market debt and other risk-assets remains significant. In this environment of very low interest rates by developed economies, the yields on emerging market debt like Ghana and other risk-asset classes prove very attractive to investors. Therefore, in the medium term to long term, good opportunities are going to continuously exist within the asset class. Ghana has exhibited improved credit quality over the years. A banking sector reform, including recapitalization of banks and liquidation of insolvent financial institutions has encouraged better governance, credit quality and liquidity in its Capital Market.

Why Invest In Government Bonds?

Risk Free

Government bonds promise assured returns and stability of funds to investors. They have always been an example of risk-free security. Thus, investors looking for a risk-free investment, government bonds are suitable for them.

Returns

The returns from government bonds are generally as good as bank fixed deposits. Also, there is a guarantee of principal along with fixed interest. Unlike bank deposits, these bonds are available for a longer duration.

Liquidity

One can buy and sell government bonds like equity instruments. The liquidity in these bonds is as adequate as banks and financial institutions.

Diversification

Investment in government bonds makes a well-diversified portfolio for the investor. It mitigates the risk of the overall portfolio since government bonds are risk-free investments.

Government of Ghana bonds are one of the safest investments in the world. It is suitable for investors who have low-risk tolerance as they prefer security in their investment. Usually, investing in market-linked instruments, there is the uncertainty of capital appreciation. Hence, they also act as a long-term investment option for investors who do not have the education and experience in trading other asset classes. Further, investors can purchase government bonds to dilute the overall market risk in the investment portfolio.

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the author and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Obsidian Achernar (“OA”) has not independently verified, validated or audited such data. OA accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

2 comments on “Attractive Bond Yields In Ghana

  1. Mawuko Cudjoe Avorgbedor on

    Dear Team,

    Great content, but I think the header “What are Government Bonds?” should rather be “What are Bonds?” because the contents also captures about corporate bonds.

    Cheers
    Mawuko

    Reply

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