Business News of 2014-07-22

‘Harness capacity of institutional investors’

The Chairman of the Ghana Stock Exchange, Dr Sam Mensah, has stressed the need for the country’s capital market to harness the capacity of institutional investors to create a large pool of capital. This, he said, had become necessary because of the need for more capital to bridge the huge infrastructure gap in the country.

Dr Mensah was speaking to the GRAPHIC BUSINESS on July 15, after the launch of the 2014 edition of the Ghana Investment Awards in Accra. The award was instituted to recognise and reward players in the capital markets who have contributed to the growth of the economy.

“We need more capital; much larger pools of capital than what we have had in the past, because of the need for more infrastructure projects in the country. But our markets are too small to do this,” he said. According to Dr Mensah, an opportunity available to the country is to focus on institutional investors to provide the needed capital.

“We need to harness the institutional investor capacity that we have in Ghana; look at insurance, pensions, mutual funds, unit trust, and give them the capacity so they can make more capital available with long maturities,” he explained. According to him, one major constraint of not being able to raise large pool of capital stems from the nonexistence of a corporate bond market.

“The corporate bond market is non-existent. You don’t have companies going to the market to issue bonds, and, as a result, our market is not able to provide the long-term debt that is needed for infrastructure development,” he said. Infrastructure projects such as the construction of thermal plants, dams, roads among others had a long lifespan, hence the need for a more developed bond market to provide the long term capital needed to finance them.

Managing economic risks

According to Dr Mensah, the economy was more exposed to risk as a result of globalisation. “Opening the domestic markets to foreign investors, and entering into the foreign capital markets to issue Euro bonds; what we have actually done is to create more vulnerability to risk,” he said, citing risks related to foreign exchange and interest rates.

The domestic capital market, he explained, had failed to perform one of its most important functions, which is to provide on instrument for managing such risks. “To do that means our capital markets have to start trading risk management instruments such as derivatives on interest rates and foreign exchange commodities. We need to make such transitions,” he added.

Dr Mensah also explained that it was difficult to finance a service economy with debt hence the need to develop the equity market to achieve that. “A service economy requires more equity. Service economies and industries do not have hard assets that can serve as collateral so they tend to rely more on equity financing. We need to provide more equity in various forms to enable the sector to continue to lead the economy,” he explained further.

The President of the PNIC, Mr Kelvin Abdallah, explained that the awards were in recognition of the efforts of players in the investment sector as they contributed largely to the growth of the economy.

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