RaboResearch - Economic Research

Country Report Ghana

Country Report


Ghana flag

Ghana sees robust economic growth on the back of the nascent oil sector, but the lack of fiscal discipline raises concerns about future debt sustainability and increases vulnerabilities.

Strengths (+) and weaknesses (-)

(+) Stable democracy

Given the strong democratic institutions, the entrenched multi-party political system and the peaceful changes of power, Ghana is one of the politically most stable countries in Africa and therefore attractive to foreign investors.

(+) Generous natural endowments

Ghana’s agriculture-friendly environment has enabled it to be a net food exporter and therefore be resilient to shocks on the international food commodities markets. Furthermore, Ghana’s cash crops and mineral resources, cocoa, gold and oil, are important foreign currency earners.

(-) Persistent twin deficits, a matter of concern

Ghana’s lavish spending patterns in past years have resulted in structural and significant fiscal deficits, and weighed heavily on the current account deficit, rendering Ghana highly reliant on external funding.

(-) Narrow economic and export base

With 79% of exports represented by cocoa and natural resources, Ghana is very vulnerable to highly volatile international commodity prices. Furthermore, agriculture provides 42% of total employment, so developments in this sector have a significant impact on the economy.

Key developments

1. Economic growth is robust, though slowing down

After a remarkable 14.4% real GDP growth rate in 2011, based on the start- up of oil exploration, growth slowed to 7.2% in 2012, as oil production disappointed due to technical problems and maintenance (average output was 70,000 bpd, way below the targeted 120,000 bpd). Brisk expansion of the oil and gas sector is expected to support robust economic growth between 2013 and 2017 (forecasted growth is around 7.5% a year), while the non-oil sector will be affected by structural energy deficits and by public expenditure crowding out private investments. Ongoing infrastructural projects, such as the Bui Dam and the Western Corridor Gas Infrastructure Development Project, should help to relief the energy supply bottlenecks and be supportive of growth. 

2. Soaring twin deficits raise concerns about debt sustainability and external imbalances

In 2012, the already large fiscal deficit ballooned to 11.9% of GDP, much higher than the originally budgeted 4.8% of GDP and the adjusted target of 6.7% of GDP. This highlights Ghana’s lack of fiscal discipline and the poor reliability of its economic management. The upsurge in expenditure is particularly worrisome because it was driven by recurrent expenditure (72%), with wages accounting for half of this, and limited spending on capital investments that contribute to future growth potential. Another matter of concern is the increasing public debt, which reached 50% of GDP last year, and is expected to rise further to 52% in 2013, almost double the level attained after debt relief in 2006 (33% of GDP). The deteriorating fiscal metrics will raise debt costs, as indicated by the July Eurobond issue, when Ghana had to pay an 8% yield. The high demand for Ghanaian debt, reflected by the fact that recent domestic and international debt issues were oversubscribed, provides some comfort. So does the high share of concessional debt (78% of total external public debt). Furthermore, donors are an important source for financing the fiscal deficit (aid amounts to 3.1% of GDP). However, Ghana’s fiscal imprudence might strain the relationship with donors, especially since the budget target for 2013/2014, a 9% deficit, is once again not very ambitious. Therefore, concerns about Ghana’s debt sustainability are rising.

On top of that, an increasing share of domestic debt (currently one-third) is owed to foreigners, leaving Ghana exposed to a high risk of capital outflows. Therefore, recent volatility in emerging markets due to jitters about the US Federal Reserve tapering its monetary easing program is a particularly worrisome development. As a result, the yields on the Ghanaian 10 year Eurobond soared by 36% between 3 and 25 June, an upsurge similar to that of Nigerian (39%) bond yields. However, bond yields of other countries such as Rwanda (16%) rose less steeply, indicating that Ghana is no longer the African champion. The lavish expenditures also put pressure on the current account deficit, which widened to 12.1% of GDP, up from 8.8% in 2011, although imports for the nascent oil industry also played a role. At the same time, FDI coverage of the current account deficit dropped from 91% in 2011 to 67% in 2012, making Ghana more reliant on volatile capital inflows and debt inflows. In all, the pressures on the external balance have surmounted significantly and render Ghana highly susceptible to market sentiment. The low level of foreign debt (31% of GDP) provides some comfort, but the critical level of FX reserves, amounting to USD 5.4bn, or 2.9 months of imports, and its low liquidity ratio (92, down from 103 in 2011) imply the risk of a liquidity crisis is present. An IMF analysis concluded that Ghana’s current buffers are inadequate to shield it ‘against country specific shocks’.

Figure 1: Fiscal deficit soars
Figure 1: Fiscal deficit soars Source: EIU
Figure 2: Market sentiment towards Ghana
Figure 2: Market sentiment towards GhanaSource: Reuters EcoWin, Bloomberg

3. Elections passed peacefully, though contestation kept political tensions high in 2013

Ghana is regarded as a stable democracy, a status reinforced by two important events in the past year: the smooth power shift to president John Dramani Mahama after the death of John Atta Mills in July 2012 and the peaceful progress around the general elections on 7 December 2012. The victory of incumbent president Mahama – who received 50.7% of the votes - was contested by his rival Nana Akufo-Addo, but the results were upheld by the Supreme Court on 29 August 2013. The fact that a resolution was sought with the existent institutions without an outbreak of violence is an indication of Ghana’s mature democratic system. The contestation did increase political tensions in 2013, but the verdict should now allow the ruling National Democratic Congress (NDC), which has a comfortable parliamentary majority, to implement much needed reforms.

4. Relationship with China tested without damage

Social resentment with the increasing Chinese presence in the local economy pushed the Ghanaian government to crack down on illegal gold mining in July 2013, and deport around 4,600 Chinese immigrants. Despite some temporary tensions, the events did not have any major consequences for the Sino- Ghanaian relationship, indicating economic interest forms a solid base for it.

Factsheet of Ghana
National facts of GhanaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank

Background information

Ghana is the second-largest cocoa producer in the world and the second-largest gold producer in Africa, while recently discovered oil reserves are promising. Together, the three commodities account for the lion’s share of the export basket (79%). The largest three trading partners, France, Italy and the Netherlands, are located in Europe, despite Ghana having diversified away to Asia; Europe’s share of exports has decreased from 64% in 1996-2000 to 47% in 2007-2011, while Asia’s share increased from 8% to 17%. Ghana has developed very close ties with China, the largest source of imports and an increasingly important concessional lender. Agriculture and industry are important foreign exchange earners, which also account for around a quarter of GDP each, while services is the largest sector making up for 50% of GDP. Ghana hosts one of the most advanced financial sectors of sub-Saharan Africa, accounting for 5% of GDP. The banking sector is well capitalized and sees strong returns, but non- performing loans are persistently high.

Ghana’s largest asset is its track record of political and social stability, relatively unique for Africa. Since the first free elections in 1992, the political scene has been dominated by two parties, the National Democratic Congress (NDC) and the New Patriotic Party (NPP), both taking turns in running the country. The Ghanaian system fosters democratic values, as indicated by the relatively high ranking and sustained improvement on the Corruption perception and the Press Freedom Indices. With a per capita GDP of USD 1,592 Ghana is classified as a middle income country by the World Bank. Ghana’s progress on social development outperforms regional peers, but poverty remains high, as 29% of the population lives on less than USD 1.25 a day.

Economic indicators of Ghana
Economic indicators of GhanaSource: EIU
Notes: 1. The ‘Other capital flows’ series is not corrected for net portfolio investment flows
Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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