Banking Sector Crisis Constrain Stock Market

Growth on the Ghana Stock Exchange (GSE) has contracted for the first four months of this year, the Summary of Economic and Financial data published by the Bank of Ghana has shown.

From the data, the year to date growth of the composite index—that is the overall performance of activities of the stock market—fell from 12.4 percent recorded April 2018 to -4.1 percent in April 2019.

Again, since January to March this year, growth has contracted by 1.5, 1.8, and 2.3 percent respectively. The overall market capitalization has also seen some 11.3 percent drop to GH¢66.1 billion from GH¢58.6 billion.

The Head of Department of Finance at the University of Cape Coast, Prof. John Gatsi, believes that the poor showing is an indication that all is not well with investors in the market, as liquidity has been seriously affected after the failure of nine banks in the last two years.

“When people are not confident, they don’t participate in the market. The financial stocks also tell you the confidence investors have in the financial system. So the negative performance is a reflection of the confidence after the banking sector crisis. If foreign investors see alternative opportunities that are safer and better, they will move their capital to those investment destinations.

Some stocks have also not seen change in their value for a very long time which means activity in the market has been very dormant. This also means liquidity in the market as a result of exchanges in cash has been also very weak. So, until we restore liquidity the response to the market will continue to be weak as we go along. So, we need to work assiduously to restore confidence,” he said in an interview with the B&FT.

The situation is not different with financial stocks. Growth in the financial stock market has also contracted for the fourth consecutive time this year.

From the data, the year-to-date growth rate of financial stocks has also plummeted to -6.2 percent since April 2018 when it grew by 40.1 percent, indicating over 40 percentage points contraction.

Since the beginning of 2019, financial stocks have not seen any growth except contraction. Growth contracted by 2.1 percent, 3.4 percent, and 1.4 percent in the first three months of this year.

Aside from growth that is contracting, market capitalisation—which is the value of financial companies on the stock market, calculated by multiplying the number of shares by the present share price—has also been disappointing; reducing by GH¢6.2 billion to GH¢13.7 billion, representing 31.2 percent drop within a year.