Quarterly Financial Markets Report Second Quarter 2016 Global Economic Highlights Highlighted by UK’s vote to leave the EU, weak demand, high unemployment levels, financial frailties and geopolitical risks, the global economic environment continued to be plagued by weakened growth prospects in the last three months. The late June U.K. referendum to leave the European Union sent shock waves across the globe, leaving global financial markets in turmoil. The equity markets fell sharply and the British Pound plunged 8.4% and 12.5% against the U.S. Dollar and Japanese Yen, respectively. The value of the British Pound against the US Dollar was at its lowest in the past 31 years. Reassurance on support from the central bank saw the economy enjoying some reprieve as the financial markets rebounded partially in fragments. With manufacturing growth stalling over the past year and construction figures weakening markedly in June, U.K. growth continued to be driven primarily by the services sector. The rate of Consumer Price Inflation (CPI) remained low at around 0.3% partly due to relatively subdued global demand growth. Both Standard & Poor’s, and Fitch on the back of the foregoing downgraded U.K’s credit ratings. With a lift from the European Central Bank’s stimulus cut, low energy prices and a rebound in consumer spending, figures from the 19-nation bloc were impressive before the Brexit, with GDP rising by 0.6% in Q1 2016 despite a backdrop of the global market turmoil at the start of the year. However, questions about the EU’s stability and the potential for an economic downturn after Britain’s surprise exit from the EU dominated the centre stage in the Eurozone at the end of the second quarter. The U.S. economy saw a modest improvement in the second quarter after the Q1 2016 lacklustre growth of 1.1%. The Purchasing Managers Index (PMI came in at 51.3, housing activity increased to 1,189,000 and retail sales showed a better growth of 0.6%, respectively. However, a string of disappointing reports on employment which grew by less than 200,000 for three consecutive months resulted in the U.S. Federal Reserve (Fed) failing to raise interest rates in June as anticipated. The negative interest rate adopted by the Bank of Japan (BoJ) early in the year seems to be working in their favour as the Yen continued to strengthen. Reports also identified an expansion in economic growth during Q1 2016; Gross Domestic Product (GDP) grew at an annualized pace of 1.7%, up from the -1.8% annualized rate in Q4 2015. It was not all rosy for Japan as the 2.0% inflation target remained elusive. China’s economy continues to face daunting challenges but GDP impressively rose by 6.7% in Q2 2016 from a year earlier. Improved industrial output and retail data, as well as slowed investments suggest that the economy is responding to the transition from export and investment-led to consumer-led growth. Commodity Market Highlights A tepid global economic environment helped commodities bounce back during Q2 2016. Gold continued to increase in value, closing June at US$1,278.0 per ounce, up by 7.0% for the quarter and 24.0% since the start of the year. Oil prices were very volatile during the quarter, falling to as low as US$37.0 per barrel, then briefly touching US$51.0 per barrel and finally settling at US$48.57 per barrel by the end of Q2 2016; this provided a much needed boost to emerging markets. Significant outages of global oil supply especially from Nigeria, US and Canada contributed to rising oil prices during the quarter. Cocoa (ICCO) daily price averaged US$3,123.0 per tonne, up by US$49.0 compared to the average price of US$3,074.0 recorded in the previous quarter A Licensed Dealing Member of the Ghana Stock Exchange Domestic Economic Activity Improves Marginally The domestic economy registered some gains this quarter. It has been able to weather some of the challenges posed by the upward adjustment in the ex-pump prices of petroleum products earlier in the year, and its pass- through effect on food prices, utility tariffs, and the recurring energy supply challenges. The latest update of the Bank of Ghana’s (BoG) Composite Index of Economic Activity (CIEA) reflected some modest pickup in Q2 2016, although at a slower pace than the same period last year. Over the period, inflation slipped from 19.2 % at the end of March to 18.7 % in April: however, an upsurge in fuel prices saw inflation rise by 0.2% to 18.9% in May, but has since declined to 18.4 % in June on the back of reduced prices of non-food items. Selected Economic Indicators Indicator Q2 2016 Q1 2016 2015 2014 Revenue & Grants (% of GDP) - - 22.20 24.75 Tot. Expenditures (% of GDP) - - 26.70 28.30 Total Debt Stock (% of GDP) - 65.10 71.60 70.20 GDP Growth (%) - 4.90 5.00 4.00 Budget Deficit (GHS BN) - - 128.80 10.64 B. D. (% of GDP) - - 8.00 9.40 Gross Reserves (USD BN) - - 5.95 5.46 Gross Reserves (MOI) - 3.30 3.40 3.20 BoG Policy Rate (%) 26.00 26.00 26.00 21.00 Inflation (YOY %) 18.40 19.20 17.70 17.00 GHS/USD 3.92 3.83 3.79 3.20 GHS/USD - Depreciation (YTD %) -3.28 -0.90 -15.66 -32.45 91 Day Treasury Bill 22.79 22.60 22.90 25.81 GSE CI (YTD %) -10.40 -4.16 -11.77 5.40 Ext. Debt/GDP (%) - 38.70 42.80 39.40 Cocoa-Futures (£/tonne) 2299.00 2152.67 2256.33 1908.50 Gold (USD/ounce) 1321.00 1237.00 1160.10 1266.40 Oil- Brent- Spot (USD/Brl) 50.30 40.60 38.30 62.40 Source: Bank of Ghana, Ministry of Finance, Statistical Service, Reuters The Monetary Policy Committee (MPC) of BoG met twice over the period. At the end of its 70th and 71st meetings, the committee maintained the Policy Rate for the fourth time this year at 26.0%. Following a review of domestic and external economic developments during the first six months of the year, the MPC in arriving at its decision noted progress in inflation and other key indicators. Economic Indicators & Treasury Rates 28.0 (June 2012 -June 2016) 26.0 24.0 22.0 20.0 18.0 16.0 14.0 Rate (%) (%) Rate 12.0 10.0 8.0 Inflation Bog Policy Rte 91-Day 182-Day Source: UMBS Research, Statistical Service, Bank of Ghana 2 Quarterly Financial Markets Review Second Quarter 2016 Tight policy stance and improved inflows helped the local currency register some stability on the international forex market. As at the end of June, the Cedi had depreciated by 3.28 % against the US Dollar, compared to a depreciation of 26.05% in the same period last year. With the government aiming to sustain its fiscal consolidation through the International Monetary Fund (IMF) programme, GDP for Q1 2016 came in better at 4.9 % compared with the 4.5 % recorded the same period last year. Nevertheless, capping public debt proved difficult as the stock of public debt increased to GHS105.1 billion at the end of May 2016, representing 66.4% of GDP, as against GHS103.1 billion at the end of March 2016, representing 65.1%of GDP. The financial summary recently published by BoG also indicated a sharp swell in commercial banks’ Non-Performing Loans ratio (NPL) from 14.6% in January to 19.3% in May, and Capital Adequacy Ratio plunging to 16.6% in May from January’s 17.9%. This poses risks to banks as their exposure to credit risk weighs on their balance sheets. This effect may bear on business and reduce business and consumer confidence in the coming months. In other news, the regime of high interest rate and power cuts resulted in a number of companies laying off workers; this was underpinned by a survey conducted by the Institute of Economic Affairs, (IEA) who identified unemployment to be the economy’s biggest challenge. Stock Market Highlights Market Indicator Jun-16 Mar-16 Dec-15 Sep-15 Jun-15 GSE Composite Index (CI) 1787.50 1912.02 1994.91 2,009.52 2352.23 Points Gain (Loss) -124.52 -82.89 -266.11 -342.71 -40.65 Percent Chg Y-T-D (%) -10.40 -4.16 -11.77 -11.12 -1.80 GSE Financial Index (FI) 1671.30 1823.93 1930.06 1,933.24 2222.15 FSI-Points Gain (Loss) -152.63 -106.13 -313.57 -288.91 -21.48 FSI-Percent Chg Y-T-D (%) -13.41 -5.50 -14.00 -13.83 -1.00 Volume of Trades (M) 25.22 36.76 84.75 36.63 36.03 Value of Trades (GHS MN) 75.13 42.61 77.78 49.96 54.47 Market Capitalization (GHS MN) 54,790.80 54,805.07 57,116.87 62,183.49 64,616.47 No. of advancers 3 7 9 6 9 No. of decliners 19 15 19 16 10 Source: UMBS, Ghana Stock Exchange Gainers Fan Milk (FML) was the lead gainer; up by 16% Aluworks (ALW) shareholders may be disappointed going another year without dividends, however a hopeful investment of US$25 million from Vedanta Resources, one of the world’s largest diversified natural resources companies helped the stock; it added 13% at the end of the quarter Attractive bargain prices compared to year open led to Ecobank Transnational Incorporated (ETI) also gaining 6% Jun-16 Mar-16 Equity Price (GHS) Gain (GHS) Change (%) Fan Milk Ltd (FML) 8.50 7.35 1.15 15.65% Aluworks Ltd (ALW) 0.09 0.08 0.01 12.50% Ecobank Transnational Inc.