Ghana: Sustaining Growth Momentum

Ghana has been one of Africa’s star performers, boosted by expanding oil production. But currency volatility, foreign-investor jitters and an upcoming election pose challenges.

Cape Coast town ancient slave castle in Ghana.

Economically speaking, Ghana is one of Africa’s current star performers. The economy grew 8.1% in 2017, making it one of the three fastest-growing economies on the continent. This decelerated to a still-strong 6.3% in 2018, according to the World Bank. This has been driven by “strong growth in mining, petroleum, agriculture and sustained expansion in forestry and logging,” says a June World Bank report.

This sterling performance, at a time when many other African economies are struggling, explains the Bretton Woods Institutions’ robust projections for 2019. The World Bank expects the Ghanaian economy to expand by 7.6% this year, with both oil and non-oil sectors contributing; and the International Monetary Fund (IMF) estimates 8.8% growth this year.

However, exceeding or even maintaining these growth targets is “a tough task, especially given the risk of overheating,” says Menzi Ndhlovu, a senior analyst at Signal Risk in Cape Town. “A few factors can ensure robust growth in the foreseeable future, including oil, cocoa, gold and other mining and agriculture sub-sectors—assuming a stable commodity market, increased industrialization/industrial capacity and foreign direct investment.”

A long-run necessity, Ndhlovu argues, is to limit Ghana’s steep imports and substitute locally produced goods—a goal already envisaged in the government’s One District, One Factory policy. The program seeks to locate one factory in each of Ghana’s 200-plus districts, the third tier of government after the national and regional governments.

Oil is playing a pivotal role in Ghana’s economic rise, says Ndhlovu. Output is still less than in Nigeria or Angola, which are each producing upward of a million barrels per day (bpd). Ghana’s oil production started officially in December 2010, but its growth has been staggering. In February this year, the government pegged output at 196,089 bpd, and output is set to more than double to about 500,000 bpd by 2024.

Questions as to the long-term sustainability of Ghana’s reserves and the specter of global oil slumps speak to the need to manage oil dependence and nudge the economy toward diversification. The World Bank warned that despite current outstanding growth performance, that is the way to the future for Ghana.

That won’t be easy. Despite its increasing oil riches, Ghana has wrestled with persistent energy shortages, which hold back the economy even at its current fast pace.

The energy problem “is rooted in policy and administrative shortcomings,” says Ndhlovu, “so there first needs to be sufficient political will to actually [solve it].”

One option, he says, would be for Ghana to diversify its power sources, with aggressive new bets on hydro- and thermal-intensive production. Alternatively, it could make more-serious strides into renewables like wave and solar energy. Ghana could also tighten up on the payments and regulatory environment, although this may be politically risky ahead of elections scheduled for 2020. Additionally, Ghana could resolve shortcomings in power distribution.

Monetary Worries

Ghana also faces monetary policy challenges, especially regarding the exchange rate of the cedi, Ghana’s currency unit. In January, the Bank of Ghana reduced its base lending rate by 100 basis points. The cedi lost about 17% of its value over the next three months as investors pulled money out of the fixed income market. The currency recouped some of its losses and is back to stability, bolstered by a new eurobond issue in March that was intended partly to finance maturing obligations and partly to fund a higher than expected budget deficit. As of July, the cedi now seems supported at around the 5.4 level.

One reason, says Samir Gadio, head of Africa strategy in fixed income, credit and commodities research at Standard Chartered Bank in London, may be that pressure from dividend payments in the second quarter has receded. Furthermore, bond maturities are lower in the early third quarter.

The main source of the cedi’s weakness over the past year or so has come from foreign investors who have not been reinvesting coupon and bond principal payments. While foreign holdings of local bonds are lower, they remain large by historical standards, Gadio says.

That hasn’t stopped Ghana from approaching the global debt markets with more confidence. In March, Ghana issued its seventh, three-tranche eurobond, giving it a total of $3 billion of paper in the market. According to the World Bank, $2 billion will be used for budgetary financing and $1 billion for liability management operations. Coupon rates were 7.85% for a seven-year tranche ($750 million), 8.13% for a 12-year ($1.25 billion) and 8.95% for a 31-year ($1 billion).

Stability for the cedi may not last, however, especially due to the volatility of important commodities, such as cocoa. There are ongoing concerns, too, whether the government can maintain fiscal prudence without ongoing pressure from the IMF.

“A good move would be demonstrating a track record of fiscal discipline and sound policymaking,” Ndhlovu says.

Early this year, Ghana reluctantly concluded a four-year extended credit facility with the IMF that had “paved the way for a significant improvement of Ghana’s macroeconomic performance,” the fund said in a March 20 release, “though challenges remain.”

A return to the IMF in the short term is highly unlikely, Ndhlovu says. The fund is not particularly popular in Ghana and neither is fiscal discipline, which the IMF would demand. “[Avoiding] this will be a personal political goal for [President Nana] Akufo-Addo,” who is running for reelection, says Ndhlovu. If Ghana returns to the IMF, it will most likely be after the election, he notes.

Ghana has undertaken a banking sector reform in the past couple of years, revoking the licenses of seven insolvent banks, for example, and bolstering capital requirements while tightening verification protocols.

Were those efforts sufficient? “The jury is still out,” says Ndhlovu. Sentiments are skewed toward the positive, however; and rating agencies, the World Bank and other institutions still point toward continued recovery thanks to improved sectoral stability and the prevailing growth environment. That said, nonperforming loans remain a concern for investors, along with regulatory enforcement and compliance.

The Economy and the Election

Better emerging-market risk conditions could ease rollover risk for nonresidents, Standard Chartered’s Gadio suggests, especially if the Ghanaian authorities remain committed to fiscal discipline ahead of the 2020 elections. Adequate and consistent foreign exchange supply from the Bank of Ghana will nevertheless be needed at times to absorb pressure on the cedi.

Gadio points to two supportive developments for the cedi. First, Ghana’s trade surplus widened materially in the first half to $1.9 billion on lower imports while the current account position turned marginally positive. Second, proceeds from the annual cocoa pre-export syndicated facility in September should temporarily boost foreign exchange reserves, easing pressure on the currency later this year.

Ghana is the world’s second-largest producer of cocoa, after the neighboring Côte d’Ivoire. Ndhlovu believes that commodities can support currency stability, first via export earnings and second through strong performance and a sound business environment that drives up investment.

The most significant headwinds Ghana faces are the upcoming political cycle and associated policy inertia, adverse changes in global commodity markets and other shocks to the primary sector, Ndhlovu says. Economic performance will be a big issue in the elections scheduled for December of next year. The opposition National Democratic Congress has chosen the immediate past president, John Mahama, as its candidate to face incumbent Akufo-Addo, who defeated him three years ago. The poor state of the economy in 2016 swayed voters in favor of Akufo-Addo and the ruling New Patriotic Party (NPP).

Statistical growth notwithstanding, Ghanaians want to see and feel the economy is working for them, delivering better jobs and higher standards of living. This could push the NPP toward politically expedient fiscal expansion. An Akufo-Addo victory would ensure policy continuity, which investors often welcome, Ndhlovu says. Prospects under Mahama, a social democrat, will depend on which policies he is able to implement, but the US Congressional Research Service finds that despite philosophical differences, historically, “the parties’ election platforms and policy records have been broadly similar.”