Sunday, 13 December 2020

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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