Macroeconomic Determinants and Their Impact on Ghana’s Bond Market Performance: An Empirical Analysis

Abstract

Aims: Ghana's economy has faced challenges over the past few years, including power fluctuations (popularly called "dumsor" in the local parlance), the financial system clean-up, and the COVID-19 pandemic. These events have severely impacted the economy's real and finance sectors. Hence, this study examined the effects of key macroeconomic factors on Ghana's bond market. Methodology: The study employed a quantitative methodology utilizing secondary data from 1990-2022. The analytical techniques involved both descriptive and inferential statistics. The Johansen cointegration methodology and the Vector Error Correction Model (VECM) explored the long-run and short-run relationships. Results: The results showed that Ghana's bond market responds positively to interest rates, GDP growth, and inflation. Banks' credit to the private sector was also significant. In the short run, only the exchange rate matters, with a positive correlation to bond yield. However, it has a negative impact in the long run. Conclusion: The key macroeconomic variables that significantly impact bond market performance are the exchange rate, GDP growth rate, and interest rate. However, bond performance is positively impacted by the growth rate in GDP and interest rates and negatively affected by the exchange rate over the long run; only exchange rates have a short-run effect and are positive. Recommendations: Financial sector regulators, such as the Bank of Ghana, should stabilize the macroeconomic environment, particularly interest and exchange rates, to enhance the return on investment and the competitiveness of the private sector. The study advocates intense public education by the government to reorient citizens about the consequences of excessive demand for foreign products on the economy. They should also intensify the Buy Ghana, Love Ghana Campaign. Again, the import substitution industrialization strategy should become the bedrock for framing industrial policies. These policy measures will help address the country's exchange rate challenges.