In July 2019, PGIM Fixed Income was one of two asset manager participants in an initiative by the Structured Finance Association to meet with several Capitol Hill offices, the FDIC (Federal Deposit Insurance Corporation) and the OCC (Office of the Comptroller of the Currency) to seek clarity from bank regulators and legislators on the Valid When Made doctrine and to overcome market uncertainty due to the Madden v. Midland Funding decision and follow-on cases (e.g., Cohen v. Chase Card Funding and Cohen v. Capital One Funding) where credit card securitisation trusts themselves have been listed as defendants. We feel strongly that the breath of the Madden result has had negative consequences from a social perspective because the decision does not differentiate between responsible lenders and pay-day lenders; and credit availability in New York, Connecticut and Vermont (the states where the Madden ruling applies) has been constrained. The recent cases raise a securitisation governance concern as well, as the costs of bad actions of servicers and other third-party service providers would be allowed to be transferred to the trusts and investors. In late 2019, in response to the efforts of PGIM Fixed Income and others, the OCC and the FDIC proposed an administrative workaround.
In September 2019, we visited Ghana in one of our standard due diligence investor trips. Ghana is a solid democracy with strong institutions and its fiscal policy follows the usual “democratic fiscal cycle”, i.e., government spending increases before the elections. The next elections are at the end of 2020 and the 2020 budget is being prepared, hence the trip.
Parliament last year approved a Fiscal Responsibility Act that stipulates that the primary balance must be in surplus or balance and that the general deficit is capped at 5% of GDP. We wanted to understand whether the government would embark in some pre-electoral spending and whether this increase in spending would bring about a cut in social programs, most notably the highly successful “free high school” program in order to respect the 5% deficit ceiling. This program costs around 0.7/0.8% of GDP per year.
The deputy minister of finance reassured us that the free high school program will continue and, also, that the government is making extra efforts to convince parents to keep their teenage kids in school rather than making them do menial, very low skilled jobs. We believe that the deputy Ministry of Finance is sincere and that the program will continue.
We see the strong governance as a key component to attracting foreign direct investment and maintaining strong potential growth. We also see value in the diversification of the economy.