The Ghanaian Flag
Red symbolises the blood shed for independence, yellow represents the country’s mineral wealth, while green stands for its forests and natural wealth; the black five-pointed star is referred to as the “lodestar of African freedom”. Ghana was the first of the sub-Saharan African states to gain independent (in 1957, from the British rule) and
took a leading role in the movement toward African liberation and unity.
Ghana: At a glance
Structure of the economy
Ghana is the second largest economy in West Africa; in the years prior to the pandemic, it was one of the fastest growing economies in the world, according to the IMF. Over the last two decades, industrialisation has been at the heart of the economic reform agenda. The expansion of Ghana’s nascent oil industry has underpinned the ongoing shift from agriculture to value-added exports. As such, the commercial production of oil has raised the share of the industrial sector in national output (34% of GDP). At the same time, like most emerging market contemporaries, there has also been rapid growth in the service sector, which is now worth 42% of GDP. While Ghana has diversified away from its pure agriculture model, this activity still plays a significant role in national output, contributing 18% of GDP. Alongside the exportation of oil, the next largest export products are cocoa and gold, making Ghana’s external balances highly sensitive to fluctuations in commodities prices.
Despite the economy slowing down as a consequence of the pandemic, Ghana fared well relative to its Sub-Saharan peers, where it actually registered a small economic expansion last year. Looking forward, Ghana is well placed to rebound from the pandemic; the recovery is likely to be underpinned by the domestic rebound in consumption and the global infrastructure led upswing, which will likely underpin demand for commodities. As such the IMF has healthy growth projections for Ghana over the next two years, where GDP is expected to expand at 4.6% in 2021 and 6.1% in 2022.
The Bank of Ghana (BoG) reacted quickly to the pandemic last year, introducing a series of measures to mitigate the impact of the resulting economic shock. These steps included a series of rate cuts, the lowering of the primary reserve requirement and purchase programmes targeting local bonds. Since then, the BoG has continued to ease policy; in a surprise move, the Monetary Policy Committee (MPC) cut the policy rate by 100bps in June to 13.50%. The easing decision appears to have been driven by the moderation in inflation, which has fallen to 8.5% in the latest reading which is well within the BoG target range of 8% +/- 2%. The accompanying MPC statement also indicated that near term inflation risks remain muted. At the most recent BoG meeting in in July, monetary policy was unchanged.
The economic damage wrought by the COVID 19 pandemic has resulted in a sharp deterioration in the fiscal outlook. The introduction of the government support package, Coronavirus Alleviation Programme (COFACE), was worth 3% of GDP. As a result, the budget deficit widened sharply to approx. 13.8% of GDP, with the Debt to GDP ratio marching towards 80%. The government was forced to abandon the 5% budget deficit cap which was introduced in 2018. Looking forward, the government appears committed to fiscal consolidation; the FY21 budget aims to bring the fiscal deterioration under control, by reducing the budget deficit to 10.8% this year and 7.5% in 2022. To ease the transition, Ghana has support via the $1bn disbursement under the IMF Rapid Credit Facility.
The December re-election of President Nana Akufo-Addo of the New Patriotic Party (NPP) was a welcome development for markets, given the poor track record of his opponent, John Mahama. That said, the slimmed down majority of the NPP (51.3%) has increased the risk of possible paralysis in the legislative agenda, reducing confidence in the government’s ability to handle the challenge of driving growth and balancing the books. Priorities for the new government will be a fundamental budget reform allowing to boost tax revenues and shift current expenditure into growth enhancing capital projects and human capital.
We are very optimistic when it comes to the outlook for Ghana. From a bottom up standpoint, the recovery is on firm footing, reflected by favorable IMF forecasts over the next two years. Likewise, the domestic rebound continues to enjoy support from the BoG; muted inflation pressure has facilitated ongoing policy easing to insulate the recovery. That said, we do note that the fiscal backdrop has deteriorated. However, we believe that there is robust government commitment to stabilise the fiscal slippage since the pandemic, which has been underpinned by IMF support.
From a structural perspective, as noted in our Roadmap for Q3 and Beyond (link to gated document), we believe that the current backdrop is complicated for emerging markets. However, in our view, there are selective alpha opportunities. Firstly, under our US-Led Growth Theme , we believe that as further fiscal stimulus enters the system, at home and abroad, the foundations for the cyclical rebound are solid. This backdrop is likely to support allocations to some emerging markets; we favour those with a strong beta to the demand for commodities and capital goods. Likewise, as noted under our investment theme – Sticky Inflation, Structural Headwinds – we stick to our longstanding view that recent price pressures are transitory. As such, we believe that the Fed will introduce a controlled normalisation of monetary policy under the AIT framework, which will encourage selective carry positions. As such, from a structural perspective, we believe that Ghana is well placed to benefit from both the global demand for commodities and the likelihood of carry demand in EM.
1. United Nations
3. The World Bank
Olympics data: Olympiandatabase.com
All other data is ESLJ, 2021.
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