16 January 2018

Ghana: Broke Companies Warned Not to Borrow

Companies which struggled in 2017 and are seeking to bounce back, should seek to raise money on the stock market, rather than borrow.

According to investment advisor Alhassan Mahama Iddrisu, companies which are already listed on the stock exchange should seek to raise financing through further equity funding at the back of excess cash in the hands of shareholders.

"The best thing for those companies now is to look for equity but they must have a solid unshakeable strategy and better collaterals to bounce back... " says Mr. Mahama Iddrisu, who is managing partner of EEAR Private Equity.

These stock exchange should also be a preferred option for non-listed firms looking for cash injection, he told Business Day.

On the other hand, borrowing should at best be seen as a last option, according to Mahama Iddrisu.

Year 2017 proved to be a difficult year for some businesses and their struggles mostly reflected in the layoff of workers and merging of operational centres.

Many business executives had expected government to cut corporate taxes to reduce their burdens and release their cash for more investments.

The good news however is that changes in three key indicators mitigated the difficult business conditions.

Mahama Iddrisu identifies these as inflation, interest rates and the prime rate trends.

Inflation

Even though government missed its inflation target for year 2017, the rate of inflation was still lover than it was at the close of 2016. Government's end of year inflation target was 11.2 per cent but government recorded a rate of 11.8 per cent inflation the end of 2017.

According to the Ghana Statistical Service's release of last Wednesday, the year-on-year inflation rate as measured by the Consumer Price Index (CPI) was "11.8 percent in December 2017, up by 0.1 percentage point from the 11.7 percent recorded in November 2017.

"This rate of inflation for December 2017 is the percentage change in the Consumer Price Index (CPI) over the twelvemonth period, from December 2016 to December 2017.

"The monthly change rate for December 2017 was 1.0 percent compared to the 0.9 percent recorded for November 2017," the GSS said.

As expected the downward trend in inflation has led to the Bank of Ghana' s Monetary Policy Committee (MPC) revising downward the policy or prime rate - dropping it from above 25 per cent to 20 per cent.

"We are coming from 15% so the major thing is the reduction of inflation, when inflation, prime rate and the treasury doesn't do well the stock market doesn't perform," said Mahama Iddrisu.

What it means is that the stock market is better positioned that at the beginning of last year to facilitate the raising of capital.

So if a business entity experienced a downward trend or made losses in 2017 and wants to turn things around, it ought to three things.

"Don't sell your shares, look at those performing and diversify your portfolio or go to the stock market to raise equity," Mahama Iddrisu advises.

On the other hand, "if you are going to borrow, anybody working with money will tell you that, you are not attractive and to be attractive, you must have collateral."

Nonetheless, the cost of borrowing in general also seems to being reducing as the trends show.

Data shows that the banking industry average base rate as at October 31 was 25.7 per cent, a marginal decrease of 0.3 per cent, compared to 26 per cent at the end of September. At the start of the year (end-January), the industry average base rate was 27.6 per cent, giving a year-to-date drop of 1.9 per cent.

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