Ghana: the most fragile of all? by Ron Derby The discovery of oil and a rising consumer class had investors positive about Ghana’s growth story, holding up the west-African country as one of the frontier markets to invest in. But the recent broad sell-off in EMs has changed the mood about the country and exposed a slate of problems in need of resolution. Source: Thomson Reuters The yield on Ghana’s benchmark $1bn bond due in August 2023 shot up to over 9.8 per cent at the end of February before cooling to just above 9 per cent, as EMs recovered from their rout at the beginning of the year. Over the past few days, the yield has been on the rise again. “The recent recovery I think has more to do with market sentiment than Ghanaian fundamentals,” said Antoon de Klerk, portfolio manager at London-based Investec Asset Management. “It is worth noting that the Ghana rally coincided with a broader emerging market spread rally.” Indeed, Ghana has been cherry-picked as a potential struggler in the new world of tightening monetary policy in developed markets. Ratings agency Standard & Poor’s recently listed the country among the three EMs most vulnerable to shifting capital flows, alongside crisis-hit Ukraine and Turkey. The Ghanaian cedi was the second worst performing African currency out of 24 tracked by Bloomberg over the past 12 months, weakening 25 per cent against the US dollar. It was stronger only than the New Sudanese pound and a lot weaker than Highlights India wedding provides clues to wage puzzle Insurgent “Common Man” steals election show Argentina and Detroit – different (zip) codes China’s bond default is no Bear Stearns moment Investing in Iraq: a frontier too far? 3/11/14 Ghana: the most fragile of all? | beyondbrics blogs.ft/beyond-brics/2014/03/10/ghana-the-most-fragile-of-all/# 2/3 the more liquid South African rand which lost 14.4 per cent of its dollar value. Currency weakness helped drive annual inflation to 13.8 per cent in January (second only to Belarus and Venezuela in Bloomberg’s global ranking). Capital Economics forecasts economic growth of 6 per cent this year and next. That sounds impressive but it masks an economy in decline: between 2000 and 2013 average growth was 7.2 per cent, according to Trading Economics, peaking at an annualised 19 per cent in June 2011. Capital’s forecast contrasts with the finance ministry’s estimate of 8 per cent. The IMF expects growth this year of 5.5 per cent. It expects growth momentum to weaken further and inflationary pressures to continue, and has called for urgent measures to address macro-economic imbalances. Slower growth is due partly to weaker prices of commodities such as gold, of which Ghana is the world’s second-biggest producer after South Africa. Oil revenues – the country began exporting crude in 2010 – haven’t been as strong as budgeted. But management of the economy has also played a part. Ghana is running twin deficits: a fiscal deficit equal to 10.9 per cent of GDP, and a current account deficit of 13 per cent of GDP. That makes it “a highly leveraged growth bet,” says De Klerk. “They are borrowing a lot, leveraging up the country and betting on growth. They’ve managed phenomenal growth rates, but things are becoming tight.” Investors in frontier markets such as Ghana, says De Klerk, should balance a desire for fiscal prudence with a recognition of the need to invest in infrastructure. For that reason, fiscal deficits of between 4 and 5 per cent were largely acceptable. Ghana isn’t in a crisis yet, but if growth drops to 5 per cent or below and the fiscal deficit remains, there’ll be “real trouble,” De Klerk warns. Ghana has other problems of its own making. For example, says Shilan Shah at Capital, only a small amount of the money it has borrowed has been used for investment. Too much of public spending goes on public sector pay, which takes nearly 70 per cent of the budget. The government of president John Mahama – unencumbered, like some in the fragile five, by the prospect of an approaching election – has announced a wage and hiring freeze in a demonstration of fiscal constraint. But doubts remain over how far Accra will go. Shah points out that wages were boosted in the run-up to elections in December 2012. “Although there is no poll, cutting the wage bill will be politically extremely difficult,” Shah says. The next election is due in 2016. In any event, tightening the purse strings may only rein in consumer spending, which makes up 60 per cent of GDP. A freeze on public sector pay, double digit or high single digit inflation coupled with a rise in interest rates may serve to only dampen economic growth. Nor will growth be helped by the central bank’s response to tapering at the Fed. As the cedi joined the sell-off in EM currencies, the bank brought in capital controls and raised its already high interest rate by 2 percentage points to 18 per cent a year. The government has also promised to boosts its coffers through a rise in taxes. Once all this feeds through, growth could slow even further over the next couple of 3/11/14 Ghana: the most fragile of all? | beyondbrics blogs
Posted on: Tue, 01 Apr 2014 12:23:37 +0000
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