Hon Shirley Ayitey interacting with Objective Capital's MD, Ros Lund, at the company's investment conference, Accra

Is Ghana attracting its fair share of today’s inflows of investor capital? GB&F’s Utche Okwuosah examines where Ghana might be coming up short.

The Government of Ghana (GoG) recently issued a three-year fixed rate bond. Barely one week later it was announced that the bond had been oversubscribed by 158.33 per cent. Government had sought to raise GH¢300 million in this offshore eligible auction to finance infrastructure projects and meet its other needs. In a happy turn of events, an amount of GH¢534 million bids were accepted, with total bids equalling a staggering GH¢775 million. Of this figure, GH¢216 million was from foreigners or non-resident Ghanaians. The bid-to-cover (amount tendered vs. amount received) ratio therefore was a whopping 2.6.

The fixed income market in general rallied following the issuance in the last week of May, with longer-dated instruments atypically leading the charge. Yields on the 1-year and 2-year notes rose by 455 basis points (bps) and 515bps to 20.50 per cent and 21.15 per cent respectively. The 3-year bond auction saw the yield on the paper jump 901bps to 24 per cent. This represents the highest rate on recent record for the country.

The central bank has communicated that the drive for higher yields is part of its attempt to reduce the amount of money in circulation which is hoped will reduce the rate of depreciation of the cedi. Foreign involvement although relatively prominent at 40 per cent was low in comparison to past government debt issuances. Local citizens took up the bulk at GH¢318 million of the GH¢534 million sold. Either way, conclusion can be drawn from that performance of the bond shows that investor confidence at the sovereign level is still intact.

The current Ghana Investment Promotion Centre's (GIPC) first quarter investment report further supports the idea that Ghana is cashing in on foreign interest.

The detail says that the "GIPC recorded a total of 95 new projects with a total investment value of $1.18 billion, representing an increase of 212.35 per cent compared to the value recorded in the same quarter in 2011."The Foreign Direct Investment (FDI) component of the estimated value of the newly-registered projects amounted to $979.85 million, an increase of 178.56 per cent over the recorded FDI value of $351.75million in the corresponding quarter of 2011. Even better, this has been the trend for the past ten years. Generally, in the last ten years, the African continent has witnessed an unprecedented inflow of investment capital. A recent report by Ernst and Young (E&Y), one of the largest international accounting firms in the world, the 2012 Attractiveness Survey on Africa notes Africa as a preeminent investment destination.

"In the last decade, Africa has seen an increase in inward investment from 339 new projects to the continent in 2003 to 857 in 2011 (an increase of 153 per cent). Investment has come from across the world, with strong growth in project numbers from rapid-growth markets and developed markets alike with projects from the former increasing from 99 to 319 and developed markets projects from 240 to 538 since 2003," the firm stated.

The report further says that the number of FDI projects in Africa grew 27 per cent from 2010 to 2011, and has grown at a compound rate of close to 20 per cent since 2007 and by 153 per cent in absolute terms since 2003.

The 2012 Survey projects an interesting and encouraging FDI outlook for countries like Kenya, for which it projected inflows of an average of $1.3 billion per year over the next five years. However this figure is dwarfed by the West African powerhouse Nigeria, which will average about $23 billion per year in FDI over the next five years.

Surprisingly, this is even less than regional giant South Africa, which will only average about $10 billion a year reflecting the level of development already attained.

This E&Y study, which generally corroborates the findings of other studies, like those of the World Bank, shows that the investing world is looking to Africa now more than ever before, and Ghana happens to be one of the economies of interest. E&Y ranked Ghana 6th on its 2011 survey of Attractive Investment Countries in Africa.

Against this background, Ghana could pride itself on already enjoying a good share of continental capital inflows. However, if the reactions gathered from the few investment events that have already taken place within the first half of the year are the barometer to go by, then the overwhelming sentiment is: "Not yet."

The investment environment is still not sufficiently conducive to encourage the kind of inflow of investments that Ghana's political and economic stability deserves, especially against the background of the competition on the continent for resources.

During the five or so investment fora that have taken place so far since the beginning of the year, featuring a good number of foreign investors, including African ones, the issue of infrastructure and favourable policies and incentives were quite ubiquitous and vehemently highlighted.

From the Ghana Oil & Gas Summit, to the Euromoney Investment Conference, to GIPC's African Investment Forum organised in collaboration with Commonwealth Business Council, to Objective Capital's West African Investment Conference, and even the World Bank's conference themed, "Addressing Challenges in Ghana-Nigeria Trade Relations to Strengthen ECOWAS", the investor challenges pointed out at these events were the same. The World Bank's forum even added the peculiar challenges of regional integration.

Every survey conducted to ascertain the challenges faced by investors in the country always came up with lists that prominently feature infrastructural inadequacies, high interest rates, lack of skilled human resource (which featured prominently at the international investment conferences) and recently, the cedi's unabating slide and its concomitant rider, an accelerating inflation rate.

The Association of Ghana Industries' (AGI) 2012 Q1 business climate survey is quite illuminative in conveying the current investment environment scenario. About 11 per cent of respondents surveyed for the first quarter's AGI Business Barometer expressed a negative outlook regarding their enterprises' performance in the second quarter of 2012 compared to that of 2012 Q1. "Low purchasing power of consumers; high cost of raw materials; and depreciation of the cedi are the main reasons for their pessimistic posture," the report inferred.

"GIPC recorded a total of 95 new projects with a total investment value of $1.18 billion, representing an increase of 212.35 per cent compared to the value recorded in the same quarter in 2011."

The report further explained: "For the first time over the last eight quarters, high levels of taxation emerged as the topmost challenge facing business operators. High utility prices and depreciation of the cedi were ranked second and third respectively. It is worth noting that, for the first time in the past two years, access to credit (ranked 4th) did not feature in the top three challenges. Poor power supply which is the greatest mover on the top 10 challenges ladder was ranked 5th (this did not feature in the 2011 Q4 survey results). This attests to the regular power outages and power fluctuation experienced by industry over the last four months." This report encapsulates some of the perennial challenges facing both the local and foreign investor, but excludes those concerning ameliorating incentives (tax rebates/holidays, tariff waivers) and improving infrastructure. Even though AGI's 2012 survey downplays its impact this year, access to credit poses a serious challenge to investors in the productive sector, for instance.



It makes expansion and improvement of efficiency difficult and consequently discourages investors because of the untenable prospect of higher costs of production driven by debt repayments.

In recent times, it has become a serious worry to those already in operation versus greenfield companies. Established firm owners complain of being run out of business because of their higher priced products against the comparatively cheaper prices of imported foreign goods. Dr John Kwakye, Senior Economist at the Institute of Economic Affairs in Accra places the problem of persistently high interest rates at the doorstep of commercial banks, the government and the central bank. Speaking recently to local media on the issue, Dr Kwakye said that the high bank lending rates and large spreads are not only unjustifiable, in terms of the costs and risks in the industry, "they also reflect industry inefficiencies, low and ineffective competition and collusive practices."

The average interest rate spread on bank loans is about 18 per cent, compared to the average rate in sub-Saharan Africa which is about 12 per cent. Ghana's rate emerged as the highest in the West African region.  Although many find the determination of lending spreads to be a discrete and complex matter, involving many factors, financial experts and economists still warn that, if allowed to persist, this high costs to finance would hurt Ghana's attractiveness to investors. Why is South Africa the most preferred investment destination on the continent? The answer is largely, the quality and adequacy of infrastructural - physical, energy and financial - and the policy environment that they offer. It is no longer a resource game as South African natural endowment may be on par or even less than countries like Democratic Republic of Congo (DRC) or Nigeria who received lower levels of FDI in the past although the tide seems to be changing slightly.

On the issue of infrastructure, whilst acknowledging that Ghana is doing somewhat better than its peers, especially in road infrastructure, the World Bank still points out that Ghana's most pressing challenges lie in the power sector. They characterise the sector as one "where outmoded transmission and distribution assets, rapid demand growth, and periodic hydrological shocks leave the country reliant on high-cost oil-based generation." Furthermore, exceptionally high losses from water distribution leave little left for end users, who are thus exposed to intermittent supply and consequent high costs.

Ghana certainly stands out glaringly in the region as a beacon to be emulated in political democracy and economic growth, with evidence on the ground to validate such claims. Yet, at the micro level, it takes more than such credentials to attract and keep investor interest and capital in a fast changing world. Investors whether foreign or local are becoming more savvy and more shrewd and are able to take their funding elsewhere at the slightest notice.

With the economic crisis in the Western world in play since 2008, the investors from developed countries are looking towards Africa now with a heightened sense of what the investment environment should be. Expectations are high. It is imperative that Ghana positions itself with continuous reforms and enduring partnership with the private sector to create a satisfactory environment that would attract a greater proportion of the investment that has been flowing into Africa in increasing measures.

Any planning without the articulation and consideration of the contemporary mind set of today's investors is bound to produce
results far too short of Ghana's optimum potential.