It is clear that Sub-Saharan Africa is moving beyond being perceived as an underdog. The continent has made significant progress on both the macroeconomic front and with regards to human development indicators. Yet, the capital markets particularly, domestic bond markets have found it tedious to use the rapid economic growth of the region over the last ten to fifteen years to promote domestic resource mobilisation.

The development of sovereign bond markets is typically spurred on by deep need for infrastructure financing. Sixty-five per cent of the amount raised for infrastructure development in Africa currently comes from government coffers. Official Development Assistance (ODA) surprisingly accounts for only 4 per cent of the world’s total infrastructure financing while private sector capital accounts for a hefty 25 per cent share. Besides being the first sub-Saharan African country to achieve independence from colonial powers in 1957, Ghana was also the first sub-Saharan African country apart from South Africa to issue a sovereign bond. In 2007, Ghana issued the wildly successful 10-year bond at 8.5 per cent coupon with interest payments every six months. The bond issue resulted in mobilising an unprecedented $750 million for investment in infrastructure projects in Ghana.

Ghana’s first sovereign bond issuing was deemed as highly successful. However, the yield on offer was the highest at the time in the markets for sovereign bonds, reflecting the perceived sovereign risk of investing in the country. A February 2011 paper prepared by the Centre for Development Policy and Research (CDPR) in collaboration with UNDP on non-traditional sources of financing reports that: “The spread over the second highest yield - Australia’s sovereign bond - was 234 basis points and 391 basis points over the USA Treasury bond. At the time of issuing its bond, Ghana had a sovereign rating by Standard and Poor’s and its rating was a B+, which corresponds to four notches below the investment grade BBB-. In August 2010, the rating was reduced to B grade due to the rating agency’s concerns with Ghana’s fiscal developments and lack of clear regulation for the oil sector.”

Despite such clear success stories as was the case in Ghana, sovereign bonds, particularly those denominated in local currency, have historically been viewed as second-tier investment assets
after equities, syndicated loans, bilateral credit lines and foreign aid even though bonds are credible sources of capital.  However, in a new operating environment where former colonial powers such as Portugal are asking their former colonies like Angola for money, the urge for self-reliance in Africa is growing stronger. It is a fact that all available fundraising avenues to meet Africa and Ghana’s infrastructural investment needs must be pursued vigorously. However, the gap in finance sourcing remains wide, and domestic resource mobilisation must be championed if Africa is to get anywhere on this challenge.

It is startling how little attention African sovereign bonds receive despite lowered performance yields of sovereign bonds in Europe and other more developed markets. This is the time to proactively advocate for African domestic bonds to investors. Forums to promote these markets, such as the G-20 Action Plan on Development of Local Currency Bond Markets, exist to help the different stakeholders to network and share knowledge. Yet still, very few African countries can tap into their domestic bond market due to a lack of regulatory institutions to govern how the market should operate, insufficient liquidity levels, narrow investor bases, quick-win maturity horizons and high costs to borrow.


Generally, what is needed in the market is increased transparency of African fixed-income data and the standardisation of methodologies between African central banks to allow for the reconciliation of data across countries. Only around 15 countries in Africa regularly issue bonds, although 28 countries have issued local currency sovereign bonds at least once in the past. African governments must begin to think strategically about how they can reduce their dependency on foreign currency denominated debt and encourage longer dated assets.

The Ghanaian corporate bond market today barely exists. Only the Home Finance Company Ltd. (HFC Bank) regularly issues corporate bonds. The number one player on the bond market is the government. The public sector now holds weekly auctions through the Central Bank for its 2-year bonds but longer maturity bonds are issued on an ad hoc basis.

In December 2007, the Government of Ghana issued the 5-year Golden Jubilee Savings Bond which was open to all Ghanaians and was an attempt to mobilise remittance resources by
extending eligibility of bond purchase to the Diaspora. As an added advantage, non-resident investors in bonds issued by the Government are exempt from taxes on their interest payments. However, since this was a retail bond, the instrument was not listed on the stock exchange. A second 5-year bond was issued in July 2011.

Africa fixed income stats.

• 24 countries are now rated by one of the three majors, S&P, Fitch or Moody’s
• 39 countries issue T-bills and 27 issue bonds
• UEMOA total listed bonds has multiplied  by 10 between 2000 and 2007, now reaching $2 (3.5% of GDP)
• Domestic public debt issuances now exceed foreign exchange reserves and external debt levels
• Volume of issuances has increased from $8 billion to 18 billionfrom 2005 to 2008

 

The Central Bank offered GH¢300 million and sold GH¢305.3 million worth of bonds although there was interest for up to GH¢448 million. The yield was 14.25 per cent.

There are three types of public sector financial instruments in Ghana: Bank of Ghana (BoG) Treasury Bills; Government of Ghana Treasury Bills and Bonds. The BoG auctions 28- and 58-day bills, mainly to manage market liquidity. The BoG also issues short-term debt instruments in three standard tenors namely 91-days, 182-days and 1-year, on the government’s behalf to fund budget requirements. Auction sizes are typically GH¢40-70 million.

The public is free to participate through banks and discount houses which can all operate as primary dealers. In April 2011, the government reduced the number of primary bond dealers to only 15 from a licenced pool of 34, which included 27 banks and brokerage houses, to allow for the emergence of a secondary market for government securities. New rules require financial institutions to have at least $3 million in capital over their sector minimum capital requirement to participate in the primary market for government securities. This reduced the population of primary dealers.

The primary dealing market was quite free, as the only requirement was that of having a banking license. Formerly, the market was over saturated with many dealers swapping financial instruments between themselves without using the exchange. Trading takes place in the over-the-counter (OTC) market and securities lending and short selling are banned in Ghana. Thus, investors usually bought bonds and held them until maturity, resulting in a lack of liquidity in the market. The new rules put forth by the Securities and Exchange Commission now dissuade investors from executing buy-and-hold strategies in order to develop a secondary market.

The diversity of institutional investors is considered medium for Ghana’s level of economic prosperity. The market currently counts commercial banks, pension funds both public and private, retail investors, insurance companies, mutual funds and foreigner entities as buyers of sovereign bonds. Banks are the main holders of government securities with more than 50 per cent of all securities issued. Foreign investors hold 20 per cent of government securities. However, Ghana’s fixed income market is criticised as having a very low domestic investor base of only between $500 million to $5 billion.

Government bonds listed on the Ghana Stock Exchange (GSE) as of October 2011 were valued at GH¢3.6 billion. Information on unlisted bonds is not available but daily prices and quotes as well as static data for Ghana’s bonds are considered to be more publicly available than that of Mauritius, Morocco and Namibia. Private sector institutions often fill in the information gap.

As an example, Standard Bank documents indicate that a HFC 5-year fixed-rate bond for US$5 million recorded a credit spread of 100 bps over Libor. In July 2011, the bond had a yield of 13.67 per cent. Investment banking technology is available, up and running.

The BoG has established an efficient and safe payment and settlement system including a Real Time Gross Settlement System (RTGS), a central Securities Deposit (CSD), as well as a cheque Codeline Clearing with Cheque Truncation System. This latest system was developed to enable secure and instantaneous settlement of payment orders, clearing and settlements of equity and debt
instruments and to record holdings of all securities in electronic form. Unfortunately, the regulatory environment has not kept up. For instance, there is no guarantee fund to protect investors in case of default by a participant.

As of 4Q11, there were 14 bonds listed with a total outstanding amount of around $1.9 billion. These bonds generally have maturities in the vicinity of 5 years or less. The country records
returns of 41 per cent in domestic bonds and 24.6 per cent in foreign denominated bonds. By comparison, over the same period, Kenya recorded -21 per cent returns on domestic bonds and
-28% returns in USD-denominated bonds. Nigeria returns were -1 per cent and -6.7 per cent respectively.




Several institutions are working hard on developing the means to strengthen the fixed income market in Africa. The African Development Bank (AfDB) is working on a Domestic Bond Fund and Index but the private sector beat them to the punch.

The Ecobank Middle Africa Bond Index (MABI) has been developed as a proportionally volume-weighted benchmark index to measure the performance of selected sub-Saharan Africa (excluding South Africa) domestic sovereign bond markets. The Ecobank MABI is governed by a clear and transparent set of rules for selecting countries and instruments eligible for the index. The index currently consists of sovereign bonds from the BRVM group of countries (Benin, Côte d'Ivoire, Senegal and Togo), Ghana, Kenya and Nigeria, with a further 12 countries being considered for future inclusion. The index is a joint initiative of the Ecobank and Nedbank.




Ghana has a history of issuing government bonds and they have become an integral part of the country’s financing. As the global economic context shifts away from traditional sources of finance to innovative solutions, Ghana could do well to look inward to leveraging its foreign exchange reserves, capturing the interest of Diasporans in development, as well as investing in the capital markets for both corporate and sovereign fund-raising activities.