Ghana's budget discipline key to Cedi's performance
Further depreciation of Ghana’s Cedi in 2019 is limited based on the outlook on
key economic indicators and foreign exchange inflows this year. ”This
expectation firmly stems from our view that we are to witness another period of
discipline from the economic authorities regarding the budget deficit” said
Victor Asante, Head of Commercial,
Corporate and Investment Banking (CCIB) at First National Bank Ghana..
Ghana delivered a strong performance on the budget in the last two years, which attracted significant portfolio investments into the country. The deficit was reduced from 8.7% of gross domestic product in 2016 to 5.9% of GDP in 2017 and further to 3.8% last year, (rebasing may have influenced this) according to latest data release by the Ministry of Finance on 4 March 2019. While the government which came into office at the beginning of 2017 must take credit for this performance, it is also noted that this performance was under the watch of the International Monetary Fund.
The nearly US$1-billion Economic Credit Facility Programme with the Fund came to an end in December so this year marks a fiscal test for the Akufo-Addo government. “We are confident that the government will stay within the deficit target. We expect that the new Fiscal Council, (set up by the President last year for the promotion of sustainable fiscal policies) and the enactment of a law this year capping the deficit shortfall at 5% of GDP in any given year, to underpin the restrain” he said.
Ghana delivered a strong performance on the budget in the last two years, which attracted significant portfolio investments into the country. The deficit was reduced from 8.7% of gross domestic product in 2016 to 5.9% of GDP in 2017 and further to 3.8% last year, (rebasing may have influenced this) according to latest data release by the Ministry of Finance on 4 March 2019. While the government which came into office at the beginning of 2017 must take credit for this performance, it is also noted that this performance was under the watch of the International Monetary Fund.
The nearly US$1-billion Economic Credit Facility Programme with the Fund came to an end in December so this year marks a fiscal test for the Akufo-Addo government. “We are confident that the government will stay within the deficit target. We expect that the new Fiscal Council, (set up by the President last year for the promotion of sustainable fiscal policies) and the enactment of a law this year capping the deficit shortfall at 5% of GDP in any given year, to underpin the restrain” he said.
That said,” we observe that for
both years, the government had to sacrifice some planned expenditures to
achieve the deficit targets as tax revenues underperformed. In 2018 for
instance, almost 1 billion Cedis worth of spending was sacrificed as taxes
missed the target by 800 million Cedis. We urge the government not to lose
focus on enforcing tax compliance this year since it could greatly improve the
fiscal outcome and calm a lot of nerves among the investor community. Investors
are on tether hooks to see what will happen without the IMF watchdog. While
this posture may slow portfolio investments in the first-half, positive budget
delivery during the period is bound to convince many people to return to
Ghana’s bond market” he noted.
Compared with the closing rate in December 2018, the Cedi
has lost over 10% to the US Dollar, 2019 year to date, trading currently around
5.51 per dollar.
According to Victor Asante, “We note that this
performance was driven largely by external developments, and on the lighter
side by the wait-and-see attitude of investors in relation to the budget as to
whether there would still be discipline without an IMF watch”.
Talking of external environment, the US Fed’s interest
rate increases in 2018 and the US-China trade issues have tilted the risk-on
effect in favor of developed markets. Ghana like all emerging and frontier
markets has suffered from capital flights. The consequent decline in foreign
exchange supply on the local market has impacted the Cedi’s performance.
Ghana is
targeting a budget deficit of 4.2% of GDP this year and “we foresee the
authorities steadily delivering on this through the year. Ghana should
therefore win back the appetite of offshore investors for its bonds and stocks
halfway through the year. This will culminate with the Fed's target this year
to do only two interest rate increases compared with four upward adjustments in
2018. In addition to Ghana's positive trade balance, which we forecast to
remain in surplus for a third year in 2019 on increased hydrocarbon production,
we think the Cedi's losses to the US Dollar will be limited going forward” he
said.
Given the recent developments in
exchange rate, Victor Asante said “we expect inflation numbers for February and
March to reflect high pass-through effects of currency weakness before tapering
off from April as the authorities take delivery of major foreign exchange
supply principally through the Eurobond Programme. Ghana’s inflation eased to
9% in January and we see it remaining between single digit or closely around
10% in the first half, on stable utility prices and increased foreign exchange
supply”.
The Central Bank is making
financing arrangements to replenish its reserves with US$850-million as early
as the end of March, according to various reports and government sources.
Hopefully the country’s final two reviews under the IMF Programme will be favourable.
This will make way for the disbursement of approximately US$200-million to
Ghana. A Eurobond sale, which “we see happening any time after the IMF review
is set to boost supply—currently the target is US$3-billion. A good performance
in the cocoa sector also means a busy minor season with Ghana Cocobod ready to
draw down US$300-million from its annual syndication. Increased oil production
should see the country earn more foreign exchange from the commodity than a
year ago— operator of Jubilee and TEN oil fields Tullow Oil Plc forecasts
combined production of over 180,000 barrels per day in 2019 from 58,100 barrels
per day last year. Lastly an initial draw down of US$647-million of a
US$2-billion deal with China’s Sinohydro Corp. for roads may start trickling in
this year, which will help to beefup foreign reserves of the country” he said.
Considering Ghana’s restrictive
budget, positive trade balance, single digit inflation and the expected foreign
exchange inflows, we think that the Cedi’s recent depreciation is short lived
and stability should return soon.
By Victor Yaw Asante, Head: Commercial,
Corporate and Investment Banking
Victor Yaw Asante is the Head of Commercial,
Corporate and Investment Banking (CCIB) at First National Bank Ghana. Victor
started his career at Unilever and has held several managerial roles in leading
financial institutions in Ghana and elsewhere and has covered other key markets
like London, Cameroun, Cote D’Ivoire, Gambia, Botswana and Sierra Leone. Victor
holds an MBA in Marketing.
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