GSE Council chair pushes for ways to protect investors

The Chairman of the Council of the Ghana Stock Exchange (GSE), Dr. Sam Mensah, is pushing for the trading of new capital market instruments that will help safeguard and protect the investing public and consumers against volatility in the economy.

According to Dr. Sam Mensah -- who has been with the GSE for the past 20 years -- globalisation and openness of the capital market has made the economy vulnerable to external shocks, requiring new instruments such as derivatives to manage the associated risks.

He said the capital market has to rise up to the challenges in the economy as the need for risk management instruments has become crucial in the face of an economy transiting from an agri-based to a service-based one over the last decade.

“Our domestic capital market is not doing one of the most important functions of a capital market, which is actually providing instruments to manage risks. The capital market has to start trading risk management instruments like derivatives on interest rate, foreign exchange, commodities etc. we need to make that transition.

“We have not paid enough attention to the transformation that the Ghanaian economy is going through, and how the capital market can rise up to the challenge of meeting the needs of that transformation. “I think it is a very significant transformation: from an agriculture-driven economy to a service economy, and from a commodity based-economy to oil and gas producer are all major transformation of the economy.

“I think that the market has to come up with products that will meet the needs of this economy. So the new economy will require our capital markets to have risk management instruments to enable us to deal with the risks of commodity prices, exchange rate, interest rate and inflation,” he said.

Dr. Sam Mensah said this in Accra on Wednesday at the launch of the fourth edition of the Ghana Investment Awards. He explained that the rise in appetite for government’s Eurobond issuance, participation of foreign investors in the capital market and macro-economic instability -- which has seen the cedi depreciate by almost 30% since January -- and the increase in the Central Bank’s policy rate, which signals interest rate trends, from 18% to 19% have all made the economy vulnerable to external shocks.

“Because of the changes in the economy as a result of globalisation and the opening-up of our domestic market to foreign investors -- as well as our own entry into the global capital market through issuing Eurobonds, what we have actually done is create more vulnerability to risk.

“We have foreign exchange risk that we are struggling to manage and interest rate risk, and so what our market lacks is instruments to manage these types of risks; and that is a weakness of our market, because in the new economy there’s going to be more risks that we need to manage; and then we have the usual commodity price risk. “So our markets lack instruments to manage risks.

“I don’t think we have given enough thought to discussions about the economy and the capital market; we have not given enough thought to what we should expect in the next 5-10 years as the economy changes and as the demands in the capital market change,” he added.

Last year, Ghana’s capital market was ranked the second-best performing stock market in Africa after Malawi’s, after returning 56.14 and 78.81 percent profit respectively to investors in dollar and cedi terms. Currently, confidence in equities generally has weakened due to the serious macroeconomic difficulties underlined by a weak cedi and high inflation.

GSE data show that trading has flagged compared to a year ago. Share volume traded between January-May 2014 was down 25 percent on a year ago, while the value recorded was lower by 20 percent. The 8.1 percent return on the market in May 2014 also compares to a 57.1 percent yield in May 2013. The weak performance this year could well mean the market produces its lowest return in three years.