The first few quarters of the year have been dominated by events related to the health and economic pandemic – including loss of life and economic livelihood. Ghana’s GDP, according to the most recent forecast from the Ministry of Finance, of 0.9% is the lowest the country has recorded since 1983. The attendant effect of the financial sector cleanup in addition to the pandemic has tested the resilience of the Ghanaian economy.
Nonetheless, in the midst of chaos, uncertainty and negative growth, Ghana still stands tall amongst her peers, recording marginal growth supported by a well-diversified natural resource base and an economic environment that drives entrepreneurship and innovation. Fund Managers are without a doubt navigating uncharted territory as they look to invest pension assets prudently for scheme beneficiaries.
The equity market, in particular, is trading at depressed levels particularly due to a combination of factors, key amongst them is the financial sector cleanup and the effects of the COVID-19 Pandemic. In addition, the lack of liquidity on the market may imply a much longer recovery for the market. Foreign investors continue to dominate trading activity on the GSE and continue to stay away from the Ghanaian market due to the upcoming elections as well as favorable asset prices in their home country due to policy support. For this reason, liquidity may be missing in the Ghanaian market for a prolonged period of time if no deliberate action is taking.
Confidence in the stock market is waning from both institutional and retail investors as wealth continues to be lost on the market. If no deliberate action is taken, there will come a time when interest is totally lost in the market. The dearth of investment options has meant pension assets are heavily invested in government securities, explaining the stability in yields. (Ghanaian pension funds have over 60% allocation to government debt only).
However, with inflation expectations inching upwards real returns continue to reduce, putting scheme assets at risk. Giving the incessant depreciation of the Ghanaian cedi, it may be prudent to increase exposure to FX yielding assets to hedge the fall in local currency. Pension Funds in developing countries are increasingly allocating capital abroad. The average foreign allocation of developing countries for which data is available is 24%. For Africa, it is 25% and 0% for Ghana.
To solve the problem of liquidity, it is imperative that policymakers provide the environment for local institutional investors – particularly pension funds – to drive liquidity on the market. This can be achieved by setting a floor on equity allocation by fund managers in the pensions industry. This policy will ensure that the market is less exposed to risks of the action of foreign investors which continue to influence the direction of the stock market. Enhanced liquidity will enhance price discovery of stocks on the market which has the added benefit of providing retail investors opportunities to regain lost wealth. Ghana continues to lag its peers when it comes to pension assets exposure to the stock market and this can explain the lack of development in activities on the bourse.
Regulators must encourage and facilitate the approval of alternative asset classes and securities in order to increase investment options on the capital market. Such asset classes/securities include Private Equity/Venture capital and private credit.
Continuous education must be prevalent in the securities industry and regulators must ensure that fund managers and trustees have the capacity to support a more developed capital market.
It is imperative to consider increasing allocation to investments such as equities and more particularly to alternative asset classes such as Private Equity and Real Estate. The regulator must provide the right regulatory framework for these asset classes to exist in the ecosystem and practitioners must ensure that capacity is built in-house in order to evaluate these assets on behalf of scheme members/beneficiaries. Regulators must go a step further by providing incentives to promote the development of these asset classes and ensure a minimum allocation to these securities particularly in equities.
In addition, taking into account that 100% of pension assets are invested in Ghana and with over 70% exposed to government securities, assets face huge concentration risk. Looking at government’s debt level – Public debt service costs as a proportion of government revenues have been rising since 2008 and are now well above Pre-HIPC levels and the minimum threshold recommended by the IMF for low-income countries – External Debt Service Costs are now well above the minimum threshold recommended for low-income countries – it may well be prudent to start the conversation in gaining exposure offshore.
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