The finance minister, Ken Ofori-Atta, today delivered the mid-year fiscal policy review of the 2019 budget to parliament. This review was heavily anticipated because of the need for clarity from government on how it plans to tackle the various challenges facing the banking and investment sector. From the minister’s speech, we learnt the following.

Fixed Income will continue to Dominate

The budget review supports my recent shift to posting more about fixed income products. The public debt as at the end of June 2019 stood at GH¢204 billion or 59.2% of GDP. The worrying part about this is that 53% of the public debt is foreign-currency denominated and therefore the debt rises in real terms as the cedi depreciates. The minister revealed the currency depreciation alone has added GH¢9 billion to the public debt.

In order to improve debt sustainability, the government will try to reduce the composition of foreign debt in the debt mix by issuing more cedi-denominated bonds. In fact, the minister announced that the government will be issuing the first ever 20-year cedi bond.

Investors can take advantage of this situation by ensuring that they have allocations to fixed income mutual funds that can take advantage of the larger yields available in the long-term.

New Opportunities in Real Estate

The government intends to set up a Real Estate Investment Trust (REIT) with the intention to provide housing for public sector workers and allow them to purchase the homes in the long-term. The rental payments people will make will count as their equity in the property and thus they can have the opportunity to purchase a home without a large initial down payment (if everything goes according to plan). The government also intends to set up a mortgage scheme called the National Housing and Mortgage Scheme (NHMS) which I hope will provide affordable mortgages to the many potential homeowners currently priced out of the market.

Increased Capital Requirements for the Insurance Industry

This is straightforward so I will just post the quote directly from the speech.

” Life and Non-Life Insurers: from GH¢15 million to GH¢50 million;  Brokers and Loss Adjustors: from GH¢300,000 to GH¢500,000;  Reinsurance Brokers: maintained at GH¢1 million; and Reinsurers: from GH¢40 million to GH¢125 million. “

Existing insurance companies have up to June 2021 to meet the increased capital requirements.

Investment Opportunities in the Real Sector

The government has been looking for partners to set up manufacturing businesses across the country. According to the minister, 57 of such projects are currently in operation. For investors interested in investing in business as opposed to financial instruments, this represents an opportunity to get into the real sector with government support.

Also, the current installed electricity capacity of the country is about 5,083 MW although peak demand is about 2,700 MW. Due to the take-or-pay structure of the contracts with the power producers, the country is currently paying US$500 million per year for power it does not use. This huge fiscal burden on government could however be an opportunity for private sector investors who have plans to invest in energy-intensive industries.

Changes in Taxes and Levies

The minister has given notice that the Road Fund Levy, Energy Sector Debt Recovery Levy and the Price Stabilization and Recovery Levy will be adjusted upwards and therefore one should expect higher fuel prices. Specifically, the increase in the levies will amount to an additional GH¢0.90 per gallon.

Also, Communication Service Tax is rising from 6% to 9% which means higher charges for things like talk-time and internet charges. However, the (unpopular) levies on luxury vehicles have been removed.

Not enough info on the Financial Sector

GH¢11.2 billion has been issued in bonds to cover the deposits of customers in banks while GH¢925 million in cash has been given to cover the deposits of “small depositors” in microfinance institutions. However, there was no information on relieving the investment industry which is currently suffering from huge exposure to some of the banks and MFIs that have gone under. Not to talk about exposure to unpaid government contractors.