Q2-2016 Outlook | Ghana – Slower growth, lower deficit expectations

By Rafiq Raji, PhD

Click to download full report (includes monthly inflation forecasts, etc)

We cut our growth forecasts, now see 4 percent growth in 2016 (previously 5.0 percent). Power cuts are still expected in Q2-2016, albeit not as persistent. There was no load shedding – ‘dumsor’ – for most of Q1, according to the Ghana Grid Company (GRIDCo), an event which motivated President John Mahama to declare an end to ‘dumsor’ in his State of the Nation address in February. Gas supply remains a major power supply bottleneck as a key gas facility was offline in March for maintenance. Pipeline vandalisation in neighbouring Nigeria – major gas supplier to Ghana – has also caused a reduction in gas import volumes from that country, reducing at some point to 6.0 mmscf out of a contracted volume of 120.0 mmscf. An expected second power supply ship from the Karadeniz Power Group (Karpower) – with a 225MW generation capacity – is not due on Ghana’s shores until the second half of the year. Emergency power supply from Karpower is currently about 225MW, connected to the Ghanaian grid in December 2015. A more sustainable approach to the the power supply shortfalls would be to privatise the state-run power utility provider, the Electricity Company of Ghana (ECG). In early May, President Mahama announced the ECG would remain in government hands, a populist gesture in light of upcoming elections in November. Worker retrenchment fears in the power sector could be devastating for President Mahama’s re-election prospects. Instead, authorities have opted for a concession arrangement – likely for a period of 30 years – with bids recently sought in this regard. Production cuts by manufacturers owing to power shortages have proved resilient, evident from reduced power consumption – about 38 percent lower than forecasted in Q1. Higher power tariffs (about 73 percent since late-2015) may also be responsible for the reduced consumption. Economic output in 2016 would be affected consequently. Crude oil production has also suffered a setback as Tullow had to shut down its facility in March. Now back on line, crude oil production from the Tullow facility is now 33 percent of the 100,000 barrels per day output prior to the shutdown. This should improve though. Cocoa production is also expected lower by about 9-10 percent in the 2015/16 season (ends on 30 September), due to inadequate rains. Estimates for the season’s main cocoa crop – which runs from October to May – are about 780,000 tonnes. The light cocoa crop – between June and September – is estimated at 40,000 tonnes. The estimated 820,000 tonnes harvest for the 2015/16 season is below authorities’ earlier forecast. In any case, there are indications future yields would not be disimilar, as Ghana’s cocoa trees age. With elections due on 7 November, government related business would also likely start slowing from Q3, as President Mahama and his ministers get on the campaign trail. It is thus our view that growth might be slower than earlier expected in 2016.

Ghana Macro Forecasts 2016 2017 2018
Real GDP, % change 4.0 7.0 5.7
Inflation, % change 17.2 7.3 6.1
Current Account Balance (% GDP) -7.5 -5.5 -5.0
Fiscal Balance (% GDP) -4.0 -2.0 -3.0
USD:GHS* 4.1 4.2 3.9
Source: Macroafricaintel Research, *year-end

We still believe authorities would stay the course of fiscal discipline despite elections; cut our deficit forecasts accordingly. A significant part of the funding mix (almost a quarter) for the 2016 fiscal year is tied to a planned US$1 billion Eurobond issuance. In a non-deal roadshow in April, authorities tried to test the appetite of the international debt markets – evidence of skepticism they would secure favourable rates as they would have preferred to issue if terms were attractive. It is highly unlikely they would be able to issue as much as they planned or inexpensively. Still, we expect authorities would issue a Eurobond later in the year, US$500 million probably. Thus, they may need to rely on domestic debt markets to meet the shortfall, further crowding out private sector participants. Nonetheless, we think the ongoing International Monetary Fund (IMF) programme – via the Fund’s US$918 million Extended Credit Facility (ECF) arrangement with Ghanaian authorities in April 2015 – provides the necessary restraints. In May, the IMF thought authorities were staying the course of fiscal discipline; highlighting the need for more restraint in regard of the public wage bill, for which slight overruns were observed. Otherwise, the Fund thought authorities were making the necessary adjustments towards fiscal consolidation, noting an improvement in the overall cash deficit to 6.7 percent of GDP in 2015 from 10.6 percent of GDP in 2014. These considerations underscore our confidence that there is unlikely to be significant fiscal deterioration around the political cycle. We thus revise our fiscal deficit forecasts: 4.0 percent of GDP in 2016 (previously 6.1 percent), 2.0 percent of GDP in 2017 (previously 4 percent).

We revise our policy rate expectations, now see a rate cut in Q4-2016. Our revisions come in light of the early retirement of former Bank of Ghana governor, Dr Henry Wampah. We did not see a cogent justification for his retiring 4 months early. Our impressions of his replacement, Dr Abdul-Nashiru Issahaku – sworn-in in April, is dovish, based on inference from his statements thus far. There is clearly a desire to cap interest rates at current levels with a view to bringing them down as soon as possible. Still, inflation remain at elevated levels and price pressures persist. Further price increases for fuel and utilities are still likely. We now see average consumer inflation of 17.2 percent year-on-year in 2016 (previously 15.2 percent), albeit we think the headline would be lower in 2017 at 7.3 percent (previously 9.1 percent). Although our end-2016 inflation forecast (14.3 percent) is higher than our previous expectation of about 10 percent, we think a now likely dovish Bank of Ghana would still find reason to cut rates in Q4 at its monetary policy committee (MPC) meeting on 18 November; almost 2 weeks after the 7 November elections. Even as Eurobond issuance plans may have been put on hold for now – an issue would be expensive in any case, IMF funding and guidance should be supportive. Thus, we do not expect significent Cedi volatility in Q2. The most recent April consumer inflation headline – a slight downtick – with the outlook not all too severe certainly makes it all but likely the outcome of Dr Issahaku’s inaugural MPC meeting as governor on 13 May would be to hold the policy rate at the current level of 26 percent.

Ghana Q2 2016 Q3 2016 Q4 2016 Q1 2017
Policy Rate, % 26.0 26.0 23.0 20.0
Source: Macroafricaintel Research

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