What business can expect in 2021
By Elorm Desewu
Even as Ghana’s electorate debate the outcome of the December 7
general elections which have seen incumbent President Nana Akufo-Addo
re-elected for a second four year term in office, the business community has
its own ideas as to how their operating environment can be expected to evolve
in 2021.
To be sure, international
business and investment community is happy that the incumbent
administration will stay in office – although their local counterparts are more
divided in their enthusiasm levels.
There are two reasons for the difference in enthusiasm between
the international business community and the local business community, one of
which is obviously political but the other is economic.
Of course, the local business community comprises supporters of
both major political parties – the victorious New Patriotic Party and the
defeated National Democratic Congress – and in a country where political
patronage by an incumbent government which is far and away the biggest spender,
is crucial, supporters of the NDC are no doubt disheartened that their easiest
way to increased business revenues and profits has been shut in their faces.
But there is also an economic reason: the incumbent government
is more inclined to do business with major international corporations and
portfolio investors than their recently defeated political opponents who are
more dedicated to local content and participation in the workings of the
economy. The returning administration traditionally prefers a strategy of local
enterprises partnering international businesses that are laden with capital,
technology and access to global markets – rather than promoting local business
to take up market share from their foreign counterparts – and such local
partnership roles are not open to all and sundry.
Actually this is in part why the international business
community is elated that the incumbent government has been re-elected. However
the other reason for this is more crucial: attracting the international trade
and investment community requires macro-economic stability above all other
considerations and this will be the priority for the President Nana Akufo Addo
administration next year.
In 2021 in particular this means a return to sustainable fiscal
deficits as quickly as possible. It is instructive that while the NDC had been
targeting a double digit fiscal deficit for its first year in office had it won
the election, because of the peculiar fiscal circumstances imposed by COVID 19
this year, the incumbent government has already announced a fiscal deficit
target of 8.6 percent for 2021 as the first stage of a three year road map
towards returning the deficit to under 5.0 percent as required by the
(currently suspended) fiscal responsibility act.
Bringing the deficit down from 11.8 percent expected as the
2020 outcome to 8.6 percent will require major fiscal consolidation but it has
the advantage of already being in power so it can avoid significant political
transition costs. Besides, since it is starting a second term, it will not see
the need for expansive public spending to reassure the electorate that it made
the right choice on December 7.
This commitment to fiscal consolidation, supported by its
successfully tried and tested policies towards cedi exchange rate stability and
the curbing of inflation can be expected to provide macro-economic stability
even as the economy strives to rebound from the inevitable slow down imposed by
COVID 19 this year, with growth expected to not be more than 2.0 percent.
Actually, the confidence of the international business
community in the incumbent government will be pivotal towards achieving
economic performance that justifies that confidence. Crucially, government
plans to issue somewhere between US$3.5 billion and US$5.0 billion in Eurobonds
before the end of the first quarter of 2021 and the success of that issue will
largely determine whether Ghana will have enough gross international reserves
to sustain the confidence of the foreign exchange markets.
This could be tricky – this will be the first Eurobond issuance done with Ghana having a public debt to Gross
Domestic Product ratio of over 70 percent, generally interpreted as an
unsustainable public debt level – but the comments of the international
portfolio investment community and credit risk analysts such as Fitch, both
before and after the election results were announced, clearly indicates that
there is enough confidence in the incumbent government for the bond sale to be
fully subscribed.
Added to the already long term high levels of Ghana’s gross
international reserves, which have remained above US$8 billion (enough to cover
over four months import bill) and the Bank of Ghana’s periodic forward forex
auctions which have pulled the rug from under the feet of currency speculators,
a successful Eurobond issuance early next year can be expected to ensure
relative exchange rate stability in 2021 barring any sudden external economic
shocks.
In turn this will be pivotal in ensuring that the central
bank’s objective of returning inflation to the median of its target band of
between 6.0 percent and 10 percent by the second quarter of 2021 is achieved.
With inflation falling to around 8.0 percent before mid 2021, Ghana’s business
community can expect interest rates to fall a notch, especially with
government’s own fiscal deficit financing needs declining compared with 2020
requirements
Importantly, government sees the potentials for spurring
economic growth through expansionary economic policy while at the same time
reining in the fiscal deficit. Bank of Ghana Governor Dr Ernest Addison has
explained that the inordinate fiscal deficit for 2020 has not translated into
macro-economic instability in the form of runaway inflation and sharp cedi
depreciation because the Ghanaian economy is still operating below capacity due
to the slump in economic activity levels imposed by COVID 19. Government now hopes to ride on this under
capacity situation to spur economic activity without generating higher
inflation and exchange rate instability in 2021.
This though will require carefully measured expansionary policy
financed largely by private capital. Indeed, the start to the ambitious GHc 100
billion Ghana CARES programme will be slow in 2021, with government expecting
private investment to front load spending under the programme while it
struggles to cut its own fiscal deficit so as not to let the public debt climb
higher.
Government has lined up a wide array of economic policy
initiatives for its second term but in 2021priority will be given to efforts
that can establish Ghana as a services hub for the African Continental Free
Trade Area, AfCFTA. Here, the focus will be on establishing Ghana as a regional
hub with regards to financial services, mining, aviation and logistics,
petroleum and automobile assembly.
An area of uncertainty for 2021 though is that of legislation.
The incumbent government had been on the verge of passing three key
legislations relating to business activity in 2020 but the combination of COVID
19 and political considerations persuaded it to stay its hand until after the
just concluded elections. These are ; a review of Ghana’s investment law; a
revised mining law; and a new insurance law. With Parliament now closely split between the ruling party and
the largest opposition party, passing these legislations will be harder than
before and the incumbent government will be ruing missed opportunities by now.
Nevertheless, the re-elected government will be focusing on
restoring balance to its finances next year while preparing the grounds for the
several new economic initiatives espoused in its 2020 election manifesto.
Therefore corporate Ghana should not expect ground-shaking change in 2021. Next
year will be devoted largely to steadying the fiscal/economic ship.
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