Previous Quarterly Editions
Expropriation Risk: 47 47 50 50 Political Violence Risk: 38 38 38 38 Terrorism Risk: 34 32 32 36 Exchange Transfer and Trade Sanction Risk: 54 52 55 53 Sovereign Default Risk: 54 54 55 56
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Ghana posted a higher than expected growth rate of 7.4% in the third quarter of 2018, up from 5.4% in the second quarter. This has helped to boost confidence in the government’s management of the economy. With the IMF-directed three-year programme of fiscal austerity coming to an end, questions are again being asked about the ability of President Nana Akufo-Addo’s New Patriotic Party (NPP) government to maintain fiscal discipline. When visiting Accra in December 2018, IMF Managing Director Christine Lagarde urged the government to ‘preserve the gains’ of the fiscal consolidation programme, which helped bring about a return to macroeconomic stability, a fall in inflation from 17% to 10%, strong growth, and a primary surplus for the first time in 15 years. During the NPP’s first two years in office, total public debt has fallen from 67% to 64% of GDP. At the same time, the budget deficit has halved from 9% of GDP in 2016. While Ghana is by no means out of the woods yet, these are significant improvements. In addition, prices for oil, gold and cocoa are stronger now than they were in 2015, when the collapse in commodity prices originally forced Ghana to approach the IMF. But the price of each of these commodities remains highly volatile, highlighting the imperative of keeping a cap on spending while paying off debt for as long as possible. A failure to keep control of expenditure can be expected to result in a spike in borrowing costs, and yet another round of fiscal austerity. Moreover, the government has yet to tackle the tough decisions it is facing on reducing the bloated public sector. The hardest of these involves curbing the number of loss-making state-owned enterprises and reducing the size of a public sector wage bill that is currently consuming some 40% of total government receipts. Having been elected on an ambitious programme of reform that included such pledges as universal free secondary education, the NNP government has been struggling to meet its manifesto promises as spending is pegged back. At the same time, economic growth has been largely concentrated in the oil and gas and agricultural sectors and has not reached many other areas of the economy. This does not look set to change in the medium term as Ghana is on track to become one of sub-Saharan Africa’s top five oil producers by 2020, when the current daily production of some 170,000 barrels is expected to reach around 250,000 barrels. Gas production is also growing quickly.
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As the government faces the major challenge posed by the large number of poorly performing and loss-making state-owned enterprises which are a constant drain on its resources, it is also looking to bolster foreign investment, which it feels should be higher. Within the West African region, Ghana has the advantage of English as a first language, a refined banking and finance environment, and strong and relatively efficient public institutions that could help foster business-process outsourcing services. The creation of new jobs for those transitioning out of SOEs, as well as those entering the workforce with qualifications in IT and other in-demand skills, is an increasing priority. Despite a welcome combination of rising output and higher prices in the cocoa sector, the regulatory board that buys the country’s cocoa crop on behalf of the government is again in financial difficulty and has had to be bailed out by the central bank.
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Apart from occasional outbursts of violence around election times, Ghana has not experienced any serious political violence since the military retired to their barracks in 1993. The greatest threats to political stability are perhaps the tendency of rival politicians to make excessive promises and then fail to deliver on them, and the danger that government largesse becomes unequally distributed between the north and south of the country.
The threat posed by jihadis migrating from the Middle East to Africa remains real. The National Counter Terrorism unit began a major training programme at the end of 2018 which features joint exercises by the armed forces, the police, the immigration services and the country’s National Security Council. The aim is to demonstrate Ghana’s readiness in the event that the country experiences an incident on the scale of the extremist attack on the capital of Burkina Faso in May 2018.
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In November, the central bank held its benchmark interest rate at 17% for the third consecutive time even though inflation is now within the bank’s target of 10%. The central bank is also embarking on a long-overdue reform of the banking sector, which has been struggling with the effects of under-capitalisation and high levels of non-performing loans. Under the leadership of a new governor, Ernest Addison, it has shut down two of the weakest institutions outright while five others are being merged into a single state-managed institution known as Consolidated Bank. It has also imposed much higher capital requirements. The intervention may have saved as much as two billion dollars in deposits held by an estimated 1.5 million bank customers and has helped to boost confidence in the financial sector.
Ghana’s total national debt is currently around 32 billion dollars, which is a significant burden for an economy valued at 47 billion dollars. However, unlike the earlier debt crisis of a generation ago, the debt was held largely by multilateral institutions, most of the current debt is held by the private sector. While Ghana has implemented several important structural reforms, including improving debt management and strengthening the banking sector, significant challenges remain. These included the need to improve the country’s low revenue base and build up its relatively low foreign exchange reserves. As a result, investors will continue to check for any signs that the risk of a sovereign default may be increasing.
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