Maintain Policy rate at 17% despite price pressures from the fiscal and external fronts – YieldRock MCS to BoG

The Central Bank
Bank of Ghana

According to provisional data from Ghana Statistical Service, GDP for the 1st quarter of 2018 was GH¢54,449.8 million, compared to GH¢46,640.1 million in 2017 (Quarter 1), representing a growth of 6.8% (year-on-year) compared to 6.7% recorded in 2017 (Q.1). This was well within YieldRock MCS’ forecast of GH¢54,185.2 million, which was 0.5% shy of official outturn. It bolsters our confidence that YieldRock’s 2018 GDP forecast of GH¢247,986.1 (FY 2017: GH¢205.914 million) is achievable considering developments on the fiscal and monetary fronts.

Despite output growth Q1, certain areas remains of concern; concerns we suspect may be shared by the Monetary Policy Committee as they convene the 83rd meeting on the July 18 – 20 to discuss price developments and related matters. Two critical sub-sectors (Finance & Insurance and Fishing) contracted by 7.9% and 8.1%) respectively (year-on-year). This has implications for credit to private sector and food import bill. This notwithstanding, YieldRock MCS holds the view that such price pressures may be moderated by fiscal adjustments soon to be presented to parliament by the finance minister in the 2018 mid-year budget review. In this article, we present arguments to support a recommendation for maintaining the policy rate at 17%.

Global Economic Conditions

  1. Geopolitical tensions and trade uncertainties may adversely impact global growth forecast in 2018 (3.9%: WEO 2018 forecast, IMF) albeit net growth is expected to remain strong on the back of U.S rebound. Already there are signals that IMF may revise growth projections for Japan and Europe due to weak consumption.
  2. Available data suggest that China has experienced its first current account deficit in Q1 2018 (USD 28.2 billion) – first of such in the last 17 years. This has happened at a time China is engaged in trade dispute with U.S over tariffs. Figure 1 shows the relative macro-economic dynamics of the two economics in Q1 2018.
  3. The hike in Federal rates by 25 basis points to 2.00% in June 2018 also presents some adjustment questions for Ghana’s capital account as potential for out flows increases along with increasing opportunity cost for portfolio investors.
  4. 4. Although Q1 GDP growth of the US economy has been revised to 2.2%, it is expected to rebound to 3.7% by Q2. On the manufacturing front, available data from Institute of Supply Management indicates that the sector’s performance slowed in April despite continuous growth. U.S manufacturing continue to register strong growth in terms of new orders, production and
  5. On the commodities front, gold price moderated on the back of weaker investment demand coupled with low consumer demand in India, despite growth in official reserves held by Central Banks. According to the World Gold Council, 973.5t gold demand in Q1 2018 is the lowest of all quarters since 2008. As at June 27 price per ounce had declined to USD 1,260.30 from a year-high of USD 1,352.40 on March 26, 2018 (See Fig. 2).
  6. After peaking at $2,694 in May cocoa price has traveled south (see Figure 3) on the back of improved production outlook during the mid-crop season. This reflected in the decline of Nearby Futures contract on London and New York’s futures market. The International Cocoa Organization however estimates demand to outstrip supply in the outlook given lower than expected cumulative port arrivals in Cote Ivoire by June 12 (2018: 1.748 million tones; 2017: 1.774 million tonnes). As of writing, data on Ghana’s volume purchases for main crop season was not publicly available.
  7. 6. Output growth from Jubilee and TEN fields coupled with soaring Brent crude prices on the world market is expected to bolster government revenue performance in H1 2018. Production from TEN and Jubilee fields went from 1,980,622 barrels in Q1 2017 to 1,999,841 barrels in Q1 2018 (0.97% growth) earning the government net receipts of $92,274,397.54 at average market price of $ 62.86 per barrel. Q2 2018 output is expected to outperform the 2,892,325 barrels produced in Q2 2017, amid favorable trends in global market price.
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Fiscal and Real Sector Developments

  1. Following a consistent disinflation trend that began in February 2018, the CPI picked up steam in May ending at 10% in June 2018, albeit well within the near term target of 8% (+/-2%). This was driven mainly by non-food pressures. Food inflation actually saw a decline from 7.6% in May to 7.3% in June compared to Non-food price increase from 10.9% to 11.2% for same period. Due to data unavailability at time of writing, there was no evidence to evaluate the extent to which, if any, current account pressures arising from Ghana’s trade imbalance may have transmitted through to local markets. What is certain however is the cedi’s volatile performance during Q2 2018 and its implications for retail prices.
  1. Provisional data on Government domestic revenue performance for January and February 2018 suggests difficulties with mobilization as programmed targets were missed on both tax and no-tax revenue. The market “gossip” regarding VAT increase in the mid-year budget to be presented on July 19, 2018 may just be one of the many considered proposals to shore up revenue. If carried through, it may have potential spillover effect on household consumption and firm investment expenditures in the near term. 
  1. Government is still on track with the quest to re-profile its debt stock by issuing long-dated instruments to refinance maturing liabilities. YieldRock MCS forecasts a year end GDP of GH¢247,986.05, translating into a debt-to-GDP of between 60%-64% assuming a debt growth projection reaching GH¢150 billion+.
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Monetary Sector Development

  1. The monetary sector reforms seem on course as banks approach the critical recapitalization deadline in December 2018. Moderation in credit creation as a result, is expected to reduce impairment losses in the run up to December. Consequently, the asset structure of the banking sector is expected to remain focused on Bills and Securities as part of an income diversification strategy.

Growth and Inflation Outlook

  1. Provisional GDP at constant 2006 prices (seasonally adjusted) in Q.1 2018 grew by 6.8% compared to 6.7% same period in FY 2017. On quarter-to-quarter basis the growth rate was 1.5% matching 2017’s growth for same period. GDP growth is expected to rebound strongly in 2nd and 3rd quarter 2018 finishing the year at an estimated value in the region of GH¢67.8 billion in Q4 2018, according to YieldRock MCS’ forecast. Inflation expectation at the retail and business level may pick up in subsequent quarters following introduction of new taxes, should it indeed transpire as reported.
  2. After balancing all considerations, risks to inflation outlook is mixed albeit tilted towards the upside. Government’s mid-year budget review and expenditure rationalization plans would be the lynch pin in moderating inflationary pressures in the outlook. YieldRock MCS foresees a maintenance of the policy rate at 17% by the Monetary Policy Committee, while at the same time advising vigilance on the fiscal front and external fronts.

Data Management

At the time of writing, the following information were not publicly available to assist with a comprehensive evaluation of growth outlook and/or inflationary expectation.

  • Fiscal Data Q2. 2018
  • Inflation expectation survey
  • Composite Index of Economic Activity
  • Balance of Trade (BoP) data.

Conclusions and judgements were therefore made by extrapolating trends using current and historical data available from Bank of Ghana, Ghana Statistical Service, Ministry of Finance, IMF and World Bank. Other Sources include; Reuters, Bloomberg, Financial Times, CNBC, Bureau of Economic Analysis (U.S), Bureau of National Statistics (China) and ISM.

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Director, Credit & Market Risk – YieldRock MCS

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