Commodities prices, banking sector’s financial soundness, and the macro-economy of Ghana

Abstract

The recent high volatility of prices in international commodity markets has increased concerns for countries that rely heavily on commodity exports. When commodity prices decrease, it can lead to lower economic growth and increased demand for credit, which can negatively impact financial soundness. Therefore, the study assesses the effect of commodity prices on banking sector’s financial soundness indicators (BsFSI) as objective one, the influence of macroeconomic variables in the relationship between commodity prices and BsFSI as objective two, and the interconnectedness among commodity prices, BsFSI and the macro-economy of Ghana as objective three. The study followed positivist quantitative and explanatory research. Seventeen variables measured on a monthly basis over a period spanning from January 2007 to March 2022 were employed. The inferential techniques employed in the order of the objectives are (a) Quantile Regression and non-parametric causality test, (b) Bi-wavelet and Partial wavelet, and (c) Time-varying parameter Vector Autoregression (TVP-VAR) connectedness and Wavelet multiple. Objective one found significant effects of commodity prices on Ghana’s BsFSI at diverse market conditions. The second objective revealed that macroeconomic variables influence the nexus between commodity prices and BsFSI in Ghana across time and frequency. The final objective found that Ghana has a significantly high degree of connectedness among commodity prices, BsFSI, and macroeconomic variables. The study recommends that policy measures on cocoa export should be tailored to bolster the sector's resilience, given its influence on foreign exchange earnings. Also, there should be a prudent approach in managing non-performing loans as it is imperative to prevent overborrowing and potential insolvency risks, especially among banks with higher capital adequacy ratios.