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Ghana: Methodical progress

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Ghana has returned to impressive growth and continues to outperform many of its African rivals

editor's pickTuesday 06, November 2018

In Banker Africa #46, the last time we turned our macroeconomic lens onto the West African nation of Ghana, we suggested that the country looked set to return to form after a difficult 2016. Broadly this statement was true. 2017 proved to be a significant improvement over 2016 with the fiscal deficit dropping to six per cent of GDP in 2017, down from 9.3 per cent in 2016 according to the World Bank. This figure alone points to the commendable efforts on behalf of the authorities to engage in fiscal consolidation.


Furthermore, this figure was achieved mainly through expenditure cuts, with total revenue underperforming by 1.1 per cent of GDP. External debt accumulation also slowed with a debt to GDP ratio estimated at 69.2 per cent in December 2017 down from 73.4 per cent in 2016. The World Bank also noted that domestic revenue mobilisation efforts are a key priority for the Ghanaian Government, which the World Bank aims to support through technical assistance to the Ghana Revenue Authority.


The country’s tax base is relatively low with the 2018 African Economic Outlook placing an estimate of Ghana’s tax-to-GDP ratio at around 16 per cent.

Ghana’s economy is estimated to have grown some 8.5 per cent in 2017, up from 3.6 per cent in 2016. This growth boost stems mainly from an increase in hydrocarbon production. In addition, Moody’s noted in a report released earlier this year that growth prospects have further been bolstered by the favourable ruling of the International Tribunal of the Law of the Sea (ITLOS) in September 2017 that Ghana had ‘not violated the sovereign rights’ of Cote d'Ivoire by developing the Tweneboa, Enyenra and Ntomme (TEN) oil fields and the development of the Sankofa oil and gas field.


Indeed, the Sankofa field alone is expected to provide approximately 180 MMscf/d (million standard cubic feet per day) for at least 15 years, which will be sufficient to fulfil half of Ghana’s power generation requirements. The Sankofa project is destined for entirely domestic consumption, meaning that is will help improve the overall stability and reliability of the gas supplies in Ghana.


“Ghana has a strong economic outlook over the next few years, supported by new oil and gas field developments coming on stream,” said Elisa Parisi-Capone, a Moody's Vice President—Senior Analyst and co-author of the report. “Access to a more reliable power supply through domestic gas resources will bolster the government's industrialisation strategy toward higher value-added products, in areas like agricultural processing.”


Inflation subsides


For July inflation came in at 9.6 per cent, down from 10 per cent in June, and down from its peak in January 2016 of 19.2 per cent. A moderate increase in the prices of non-food items, such as housing, water, and power helped drive pressures down. Food inflation remained broadly stable. This brings overall inflation closer to the Central Bank’s medium-term target of eight per cent inflation, plus or minus two points.


“Macroeconomic stabilisation is ongoing. Growth prospects remain positive, supported by strong oil production. Investor confidence has improved, as indicated by a successful issuance of the Eurobond in May 2018. Inflation has subsided to below 10 per cent. The Government has stepped up structural reforms, particularly on public financial management and strengthening oversight over state-owned enterprises (SOEs),” said Annalisa Fedelino, the leader of an International Monetary Fund team that visited Ghana earlier this year.


“The Government’s commitment to achieving the end-year fiscal targets is encouraging. Available fiscal data suggest an increase in government spending—mainly due to frontloading of capital spending and goods and services—while revenue underperformed in the first four months of the year,” added Fedelino. “Thus, we welcome the Government’s intention to present a balanced and comprehensive fiscal package to Parliament at the time of the mid-year budget review in July. Such a package would help meet the fiscal objectives and support the implementation the Government’s development agenda.”


The Central Bank has been throughout this year undertaking a period of aggressive monetary easing having cut its policy rate from its height of 26 per cent in mid-2016 to 17 per cent in May 2018, a four-year low. In late July the Monetary Policy Committee of the Bank of Ghana, however, opted to maintain the rate at 17 per cent, the first hold this year.


Governor Ernest Addison noted that this move was made in light of the possible impact on inflation of pressure on emerging economies. Addison noted that the normalisation of US monetary policy, resulting in the strengthening of the US dollar and rising US yield rates have put pressure on emerging market assets. Furthermore, the notable depreciation of the cedi against the US dollar in combination with inflationary pressures are likely the main culprits for the Central Banks decision to relax its monetary easing programme.


In addition, continued uncertainty of global trade relations and mounting geopolitical uncertainties lend support to the Central Bank’s prudent move to hold its policy rate, especially in light of Ghana’s commodity-dependent economy.


“The monetary policy stance remains appropriate and inflation is expected to continue to decline to the eight per cent target before the end of the year,” added Fedelino. “Responding to the gradual lowering of the monetary policy rate, lending rates have also been inching down. Recent exchange rate pressures are expected to be short-lived, provided that fiscal consolidation continues. A key priority is to strengthen foreign exchange (FX) management to help foster a deeper and more liquid FX market.”

PMI falls


The Stanbic IBTC Bank Ghana Purchasing Managers’ Index (PMI) fell in July to 51.8, from 52.7 in June, a 22-month low. However, the figure still remained above the crucial 50-point threshold that indicates an expansion in business activities over the previous month. Operating conditions have continued to strengthen month-on-month continuously for past two-and-a-half-years at this point.


Overall the rate of growth in business activity has continued to slowdown since May, despite a marginal output increase in July. The report points to anecdotal evidence that links the slowdown to projects reaching completion and lack of money in the economy.


Commenting on July’s survey findings, Phumelele Mbiyo, Head of Africa Research at Standard Bank said, “The private sector still showed growth for the 30th consecutive month. Nonetheless, the decline in the PMI in July signifies a loss of momentum in growth of the private sector. The pace of growth in output, staff costs, output prices and new orders decelerated in the month.”


FocusEconomics in its Consensus Forecast Sub-Saharan Africa – September 2018 note that the deterioration in the PMI was underpinned by both lower growth in new orders and a cooling in output expansion. Despite this however, job creation accelerated in July as firms looked to clear backlogged work. Additionally, the weakness of the Ghanaian cedi against the US dollar has driven up input costs, which have been partially passed along to the consumer, resulting in higher output prices.


“Even though new orders and output have been decelerating since May, purchase costs and overall input prices have accelerated in that time. The deceleration in staff costs and output prices in July reversed a trend of acceleration since April,” added Mbiyo. “Indications are that the slowdown in the pace of growth in private sector in July may be transitory. After all, the backlog of work increased in July. Furthermore, companies are increasing hiring, partly to improve operating capacity. The increase in input costs may be due in part to the depreciation of the Ghanaian cedi in May and June. Yet, with competition for customers strong, these input pricing pressures have not resulted in generalised inflation pressures.”


Finance sector holds strong


Overall the Ghanaian financial sector is adequately capitalised, but weaknesses remain in some institutions, such as high levels of nonperforming loans (NPLs), can adversely affect overall stability and slowdown credit growth and investment. The Bank of Ghana has made positive steps towards introducing reform measures to help address weaknesses inn the sector which would help improve the quality and availability of credit to the private sector.


Indeed, in early August the central bank consolidated five insolvent banks into a new, wholly government-owned bank called Consolidated Bank Ghana. The Government capitalised the new bank with GHS 450 million and endowed it with a GHS 5.76 billion bond to cover the differences between liabilities and viable assets of Consolidated Bank.


“Ghana creating Consolidated Bank supports financial stability when its commercial banking system faces high asset risks and is in the process of consolidating to meet new capital requirements. However, with the GDP costs of operationalising Consolidated Bank and the resolution of UT and Capital Bank earlier this year, we expect Ghana's debt burden to reach 72.4 per cent of GDP by the end of this year, declining to 68.9 per cent by end-2019—a higher level than previously anticipated,” said Paris-Capone.


Amidst falling short-term interest rates Ghanaian banks have begun to shift their government securities exposures to longer-dated government bonds at the expense of shorter-term treasury bills, increasing the duration of their investment portfolios.


Peter Mushangwe, a banking analyst at Moody’s said, “Ghanaian banks shifting their government securities exposures to longer-dated government bonds at the expense of shorter-term treasury bills is credit positive as it will help moderate the strain on the banks’ interest income amid falling short-term interest rates.”

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