Ghana, once known as the Gold Coast Crown Colony, was the first Sub-Saharan African nation to achieve independence from the British Empire in 1957. It was renamed Ghana to reflect the ancient Empire of Ghana, which once extended throughout much of West Africa.
The Republic of Ghana is considered by many to one of the most pragmatic states in Africa. Ghana was placed 7th out of 48 sub-Saharan African countries in the 2008 Ibrahim Index of African Governance. The Ibrahim Index is a comprehensive measure of African government, based on a number of different variables which reflect the success with which governments deliver essential political goods to its citizens.
Today the Ghanaian economy is keenly awaiting the revenue expected from crude oil production which is expected to start in the 2nd half of 2010. The IMF expects the GDP growth rate to increase from 5% in 2009 to as low as 12.5% and as high as 22.5%! The trick, as always, is to grow at such a rate while keeping inflation under control. So far, the Bank of Ghana has been showing all the right moves in order to be successful in its drive to keep inflation in check and has achieved to close in on its target rate of 9.2%. Inflation may likely fall further than the targeted rate in 2010 thanks to a tighter fiscal policy, lower food and energy prices and a stable exchange rate. In addition, the current account deficit is also expected to drop to 8.8% of GDP in 2010 from 9.4% of GDP in 2009. In 2010, the agricultural sector is expected to enjoy a robust performance; the services sector will have a strong growth rate and the capacity of the gold mines will be expanded.
In today’s increasingly multi-lateral world, new oil producing countries find themselves in a stronger bargaining position when it comes to negotiating contracts for oil exploitation than was the case over a decade ago, These days, there are simply more candidates around the table eager to bid for the concessions.
Thanks to the proceeds from the hydro-carbon activities, the government can and will implement the necessary policies to foster sustainable economic development via the modernisation and expansion of the agricultural sector, the telecom and communications sector, social infrastructure and the development of the private sector in general. The motivation is the sensible desire to have a diversified economy and thus avoiding an over-reliance on any sector.
The reality is that for foreign investors, Ghana is still a small frontier market in terms of capitalization so a local presence, insight and access is the differentiators required to run a diversified portfolio that reflects this prodigious economy. For now, most foreign investors will likely focus on Ghana’s financial sector as a proxy in order to position themselves to capture the growth. As in every economy, the banking sector ties it all together. However, recent experience has taught us all that you can’t be very successful unless you do the homework before investing. And, regardless of how sexy they may look from the outside, in the end, banks are only as good as their management and their solvency ratios as a result – simple as that.
The Ghanaian banking sector currently has 27 banks, the majority of which are focussed on retail banking. There are several international and regional banks present in Ghana with the greatest foreign influence in the industry emanating from Nigeria, which has 5 of its indigenous banks operating in the country.
In 2009, the banking industry embarked on a capital raising exercise, this is yet another initiative carried out by the Bank of Ghana, which required commercial banks operating in the country to shore up their capital base to at least $60 million. Foreign banks were required to have raised their capitalisation by the end of 2009, while locally owned banks have been allowed until 2012 to meet this target, tehy still had to achieve a minimum capitalization of $13.5 million by the end of 2010. The requirement had come about as a result of a strategy to ensure that local banks would be in good shape, be able to manage bigger risks and have the ability to finance larger projects. This will ensure that the banking sector follows though in tandem with the country’s main objective to establish the foundations of a well diversified economy.
One of the banks that, in our opinion, is best positioned to rise on the tide in Ghana is Ecobank (“EBG”) , a public limited liability company and a subsidiary of EcoBank Transnational Incorporated (“ETI”). EBG was constituted in January 1989 and commenced operations in 1990. The company was initially a merchant bank and subsequently became the first bank to acquire a universal banking license which allowed it to provide other related services such as stock broking and asset management in addition to its core business. EBG listed on the Ghanaian Stock Exchange in 2006.
EBG has engineered steady growth within Ghana, it currently has 52 branches nationwide, allowing them to mobilise more resources than many of its competitors. It is currently one of the leading banks in Ghana and the third largest in terms of assets size. The bank has one of the highest profit margins in the country totalling 41% as at the end of 2009. EBG has been able to consolidate all its various business units with high efficiency. It enjoys a large market share in the retail segment and continues to aggressively cater to consumers. This was evident as we saw customer deposits grow by 35% between 2008 and 2009.
In addition to its enthusiastic drive on the retail segment, EBG is also becoming a visible player in the oil and gas sector. EBG was recently awarded the mandate to restructure the outstanding debt for the Tema oil refinery. Ecobank Development Corp. and Ecobank Ghana Ltd. were appointed by the government to raise $300 million to settle part of the refinery’s loans and underwrite a bond issue of an equal amount in order to reorganize the company’s balance sheet.
With the prospect of Ghana’s of oil and gas deposits coming online, it goes without saying that the nation is about to make a noted entrance in the league of oil producing nations in Africa. The high rate of solvency of both the state coffers and the banking sector will fuel the confidence needed to provide to support the level of enterprise that will take the Ghanaian economy to the next level. The obvious choice is to invest in the institutions that have a strong value proposition in the areas of trade finance and wholesale banking. Ecobank and its strategy to run a business with a solid and diversified fee-based income stream is one of our favourite picks to be a winner in its league.
For the next few weeks we continue to be ‘on the road’, we will certainly be passing though your area sometime soon. If you would like to sit down with us and discuss Frontier Markets in more detail, please don’t hesitate to let us know.
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