The significant involvement of non-residents in Ghana’s domestic capital market has been described as posing a major risk to the country’s economic stability. This is according to the United Nation’s 2024 Unpacking Africa’s Debt report which admits that the influx of non-resident investors in the domestic capital market is a great sign of investor confidence in the economy.
However, despite Ghana being a magnet for foreign investors seeking returns, the UN says there is more than what meets the eye which should be a concern for the country’s economic managers.
Although the participation of non-residents in the domestic capital market is an indication of a developed capital market, their high involvement however makes the economy highly sensitive to global economic conditions, such as rising interest rates in developed economies.
The UN says Ghana, just like other African countries like Egypt and South Africa is likely to suffer volatile capital outflows if these rates become more attractive abroad. Non-resident investors may quickly withdraw their funds from Ghana’s bond market. Such outflows can destabilize the local currency, the Ghana Cedi, which is already under pressure.
In addition, another challenge the situation poses is exchange rage vulnerability. When foreign investors exit, they sell off the Cedi to convert their returns into foreign currency. This sudden demand for foreign currency can lead to sharp depreciation of the Cedi, driving up the cost of imports and fueling inflation.
For an economy like Ghana’s, where inflation is already a concern, this could have disastrous ripple effects.
“Although African countries with relatively well-developed capital markets have managed to tap into their domestic debt, they are exposed to unique risks related to the nature of the local currency debt holders. The degree of involvement of non-resident holders in the country’s domestic debt market, though reflecting investor confidence, may also threaten the country’s economic stability,” portions of the report cited by The High Street Journal noted.
“For instance, Egypt, Ghana, and South Africa have attracted non-resident investors to their domestic bond markets looking for high-yield returns. However, this was at the cost of higher interest rates and exposing them to external shocks and capital outflows,” the report further indicated.
The report justified this risk by citing how South Africa suffered massive capital outflow in the heat of the pandemic due to a credit downgrade. The country has almost 30% of its domestic debts held by non-residents and hence the mass movement affected the stability of the economy.
“At the outset of the pandemic, South Africa experienced significant capital outflow partly triggered by the sovereign credit downgrade. Despite South Africa’s limited reliance on foreign currency funding, it remains susceptible to the volatility of portfolio outflows (hot money) since almost 30 percent of its domestic financial portfolio is owned by non-residents,” the UN cautioned.
To reduce the risks posed by non-resident investors, Ghana must focus on diversifying its domestic debt holders by encouraging greater participation from local entities such as pension funds and banks. A stronger presence of local investors would reduce the country’s reliance on foreign capital, creating a more stable bond market less vulnerable to the whims of global financial shifts.
Additionally, proactive measures to stabilize the Cedi, such as boosting export earnings and effectively managing foreign reserves, can mitigate the adverse effects of sudden capital outflows, ensuring a more resilient economy.
