ORANGE INSIGHTS – A Review of Ghana’s Macro Economy for 2019 (Fidelity Bank Research)

01 Executive Summary

In the year to September 2019, Ghana’s average GDP growth came in strong albeit slower than in 2018. Growth was driven by the services sector following a recovery in the banking sector as well as strong growth posted by information and communication. The softened expansion in the first three quarters of 2019 was largely owed to industry and agriculture. For industry, output from the mining and quarrying sector almost halved compared to 2018. Growth in agriculture was weighed by a contraction in output from fishing as well as forestry and logging.

The Monetary Policy Committee eased its policy stance in January, but held rates at 16% in the subsequent meetings in 2019. In the September and November meetings, although there was room for a policy action because inflation had fallen below the mid-point of the target range (of 8 to 10%) in a newly released CPI, the Committee held rates to prevent sharp portfolio reversals which occurred after the January policy cut. In line with the stability in policy rate, interest rates on government securities were fairly stable throughout the year. At the end of December 2019, the Cedi depreciated considerably against the US Dollar, Pound and Euro. In an attempt to increase liquidity of the greenback, the regulator introduced the BOG FX Forward Auction in October.

An increased trade surplus at the end of December 2019 was more than offset by net outflows in the services and income accounts, which culminated in a current account deficit. Significant capital and financial inflows however led to an overall balance of payment surplus. On fiscal performance, government revenue fell short of target for 2019. Consequently, fiscal deficit, public debt as well as debt-GDP ratio came in wider than projected.

We expect growth in 2020 to pick-up driven by increased government spending and increasing extension of credit by banks to the private sector. Some of the sectors to drive growth are Mining and Quarrying, Construction as well as Information and Communication. The US$3bn Eurobond, which has been issued, is expected to provide the Cedi with some support against the greenback. However, dividend payments to begin in March will likely exert some pressure on the Cedi. The major risk to the Cedi’s stability is haven demand for the dollar, resulting from global uncertainty. Also, overspending ahead of the elections may dampen investor confidence and pose some risk to the Cedi’s stability.

We expect Ghana’s Monetary Policy Committee to maintain a neutral stance this year in order to prevent sharp portfolio outflows. The Central Bank recently introduced a second window facility (between 3pm and 4pm) when banks can borrow from the Regulator at the monetary policy rate plus a spread of 500bps (equivalent of 21% currently). The cost of borrowing for this window is higher than the previous (MPR plus 100bps, equivalent of 17%), and has the potential of pushing up interbank lending rates as well as lending rates to customers. The main concern on the fiscal front will be an underperformance in government revenue especially from the slash in benchmark port values and crude oil receipts if prices continue to be weighed by slowing global growth.

 

 

 

 

 

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

 

02 Economic Developments

 

 

Domestic Economy

 

According to estimates by the Ghana Statistical Service, the pace of economic activity in the first nine months of 2019 came in strong albeit slower than in 2018. Economic activity measured by Gross Domestic Product (GDP) growth, averaged 6% for the first three quarters, a marginal dip from 6.1% recorded for the comparative period in 2018. Excluding oil, GDP growth averaged 5%, down from 5.9% for the first three quarters of 2018. At current prices, the country’s cumulative GDP for the first three quarters of 2019 amounted to GH¢253.8bn, up from GH¢219.7bn a year earlier.

 

Fig 1: GDP Growth (%)

The pace of expansion of economic activity softened largely due to a dip in growth recorded by agriculture and industry. Average growth in agriculture for the nine months to September 2019, slowed to 3.8% compared to 5% for the relative period in 2018. This was a result of a 4.3% contraction in Forestry & Logging as well as a 1.1% contraction in Fishing (due to declining fish stock). Also, Crops (including cocoa) expanded by 4.5%, down from 5.6%. Livestock on the other hand saw its

average growth constant at 5.6% for both periods. Overall, agriculture commanded a share of 18.5% of total output in Q3 2019, a reduction from 19.2% in Q3 2018 and 20.8% in Q3 2017.

Industry saw its average growth for the first three quarters almost half to 6.7% from 11.1% for the relative period in 2018. This was a result of a dip in average growth by the Mining and Quarrying subsector which stood at 14.5% for the first nine months of 2019 from 24.4% for the comparative period in 2018. Additionally, the Construction subgroup as well as the Water Supply, Sewage and Waste Management subgroup each contracted by 5.2%. On the flip side, Manufacturing and Electricity both recorded a 5.9% and 4.8% growth respectively. Industry’s share of total output at the end of Q3 2019 stood at 35.7%, up from 35.3% in Q3 2018 and 33.7% in Q3 2017.

The services sector saw a welcomed 6.5% average growth for the first three quarters of 2019, up from 1.8% for the same period in 2018. The pickup follows a recovery in the banking sector after the clean-up exercise which contributed to a 1.5% average expansion in the Financial & Insurance sector compared to an average contraction of 11.3% in the first three quarters of 2018. Information & Communication emerged as the biggest driver of growth in the services sector with an average expansion of 38.7% for the first three quarter of 2019, up from 13.6% for the relative period in 2018. All the other subgroups within the services sector recorded growth for the first three

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk

quarters: Real Estate (15.4%) Health & Social Work (12.3%), Education (9%), Hotels & Restaurants (6.1%), Professional, Administrative Services (4.5%), Transport & Storage (4%), Trade, Repair of Vehicles (2.4%), Public Administration & Defence (2.2%), Other Personal Service Activities (1.4%). The services sector’s share of total output at the end of the Q3 2019 stood at 45.8%, up from 45.5% in Q3 2018 and 45.4% in 2017.

 

Fig 2: Sectoral distribution of GDP (Q3 2019)

 

Fiscal Policy

 

According to estimates by the Ministry of Finance, the country’s fiscal balance on cash basis at the end of 2019 (excluding the financial sector bailout and some banks’ recapitalization) stood at a deficit of 4.8% of GDP (equivalent of GH¢16.7bn) against a revised target of 4.5% of GDP. Including the financial sector bailout and some banks’ recapitalization, fiscal deficit for the year 2019 amounted to GH¢19.9bn, which represents 5.8% of GDP. Additionally, the country recorded a positive

primary balance, equivalent to 0.9% of GDP against a target of 1.1% of GDP.

 

Fig 3: Fiscal balance (% of GDP)

The higher than budgeted fiscal deficit outturn for 2019 highlights less robust revenue mobilisation relative to programmed targets for all the major revenue groups (despite an overall 11.8% per annum growth). The highest underperformance was recorded by the tax revenue group which came in GH¢3.3bn (7.2%) below target. Within the tax revenue group, taxes on domestic goods and services came in GH¢1.8bn (9.4%) below the revised target. The slash in benchmark port values also weighed on taxes generated from international trade which came in GH¢1bn (15.9%) below target. Total revenue and grants at the end of 2019 stood at GH¢52.97bn (15.3% of GDP), compared to the GH¢58.90bn revised target.

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

 

Table 1: Government Revenue

In response to the revenue shortfall, government cut total expenditure (including arrears payment) by 8.4% to GH¢67.7bn (19.6% of GDP). Spending was cut for all the major expenditure groups with exception of interest payments which was 0.8% above target largely as a result of higher than budgeted borrowing and Cedi depreciation. Two discretionary groups, grants to other government units and capital expenditure recorded the largest cuts of GH¢2.6bn (18.6%) and GH¢1.6bn (20.2%) compared to their respective revised targets.

 

Debt Profile

At the end of November 2019, gross public debt stood at GH¢214.9bn (US$39.0bn; 62.1% of GDP), which represents a GH¢41.8bn (24.1%) increase from GH¢173.1bn at the end of December 2018. Domestic debt made up GH¢16bn (38.4%) of the additional debt stock whilst external borrowing made up GH¢25.7bn (61.6%) of the additional debt stock, driven by the issuance of a US$3bn Eurobond in the first quarter of 2019. At the end of November 2019, domestic debt stood at GH¢102.9bn and made up 47.9% of the total debt stock. External debt was higher at GH¢111.9bn and represented 52.1% of the total debt figure.

 

 

Inflation

Headline inflation for January 2019 stood at 9%, a 40 basis points (bps) decline from the year-end rate for 2018. The decline occurred as both the food and non-food groups saw some easing.

In August, inflation was rebased; the reference year for computation of the Consumer Price Index (CPI) was

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

changed from 2012 to 2018. In addition to the change in the base year, the basket of goods and services was expanded to include 40 additional items. This increased the total number of goods and services in the basket to 267 from 307. The number of data collection points was also increased by two to 44, although inflation is still reported for 10 out of the 16 regions we currently have.

After the rebasing, inflation fell from 9.4% in July to 7.8% in August and peaked at 8.2% in November. In December 2019, inflation dipped further to 7.9%, to outperform the end year target of 8%. Headline inflation in December was driven by an 8.7% inflation rate recorded by locally produced items, whereas that of imported items came in at 6.1%. Food and Non-alcoholic beverages group recorded a year-on-year inflation rate of 7.2% in December whilst the Non-food group recorded a year-on-year inflation rate of 8.5%. The major drivers of inflation in the Non-food group were Alcoholic beverages (13.5%), Transport (11%); Housing, Water, Electricity, Gas (10.5%), Recreation, Sport & Culture (9.3%), Personal Care and Miscellaneous Goods (7.4%). Insurance and Financial Services recorded the lowest inflation at 0.6%.

Fig 5: Inflation (%)

Interest rates

The Monetary Policy Committee in January 2019 eased its stance as it slashed the key interest rate by 100 bps to 16%. In its subsequent meetings for the year, the committee held the policy rate at 16% even though inflation remained muted. Additionally, although monetary policy loosening in the US spurred easing action elsewhere in EMDEs, the Central Bank treaded cautiously as additional cuts to the rate could have weighed on the exchange rate and driven greater pressure on fiscal and external account balances as it did in January 2019.

In line with the stability in the policy rate, interest rates on government bills were fairly stable throughout 2019. Interest rate on the 91-day bill inched up by 10bps to 14.70% at the end of 2019, compared to the year open rate, whilst that of the 182-day bill rose by 10bps to 15.15%.

Similarly, the interbank lending rate, the rate at which banks borrow from each other, trended down from 16.12% in December 2018 and remained fairly flat at 15.20% for the rest of 2019.

Fig 6: Short-term treasury rate trends

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

Fig 7: Interbank average lending rates and MPR

 

Currency

The Cedi closed 2019 on a bearish note, having depreciated by 12.90%, 15.65% and 11.24% against the US Dollar, British Pound and the Euro respectively.

programme which minimized the depreciation of the Cedi against the Euro. Uncertainty about the UK’s Brexit plans tapered off some of the losses the Cedi would have experienced against the Pound. The overwhelming victory of the Conservative Party in December however significantly strengthened both the Euro and Pound against the Cedi.

At the end of December 2019, the Cedi was trading at GHS 5.5309/5.5365, compared to GHS 4.8176/4.8224 per US Dollar at the end of 2018; GH¢7.3124/7.3203 compared to GHS 6.1675/6.1746 per Pound at the end of 2018 and GH¢6.2096/6.2131 compared to GHS 5.5111/5.5150 per Euro at the end of 2018.

 

Fig 8: Local Currency Performance (Cedi vs Dollar)

 

In the first quarter of 2019, the Cedi saw a bout of weakening against the greenback following the policy rate cut which resulted in significant portfolio outflows. In addition, dividend payments put some pressure on the local currency in the first quarter. The US$3bn Eurobond sale in March however, cushioned the Cedi slightly, as the local currency reversed some of the losses recorded earlier. In the fourth quarter, the Cedi weakened considerably against the US Dollar as demand pressure rose. In order to increase liquidity on the market, the Central introduced the BOG FX Forward Auction in October. There were five issuances carried out during 2019.

Before December 2019, the Euro weakened on the global front after the ECB announced a 10-basis point cut to its key rate and resumed its bond-buying

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

 

External Sector Developments

At the end of 2019, the country’s provisional trade surplus stood at US$2.3bn (3.4% of GDP) compared to US$1.8bn (2.7% of GDP) at the end 2018. The trade surplus was more than offset by net outflows in the services and income accounts, leading to a current account deficit of US$1.7bn (2.5% of GDP) at the end of 2019, compared to a deficit of US$2.0bn (3.1% of GDP) at the end of 2018. The current account deficit coupled with a significantly higher capital and financial account surplus of US$3.1bn (compared to US$1.5bn in December 2018) culminated in an overall balance of payment surplus of US$1.3bn, compared to a deficit of US$0.7bn at the end 2018.

 

The value of merchandise exports at the end of Q4 2019 was US$15.6bn, up from US$14.9bn at the end of 2018. Gold receipts at the end of December 2019 amounted to US$6.2bn, 14.6% higher than total gold receipts in 2018. Similarly, total cocoa receipts rose by 3.1% y-o-y to US$2.2bn. On the other hand, oil revenue dipped marginally by 1.8% to US$4.5bn. Total merchandise imports also rose to US$13.3bn from US$13.1bn. Of the total import value, oil imports amounted to US$2.3bn, down from US$2.6bn at the end of 2018, while non-oil imports totalled US$11bn, up from US$10.6bn.

According to the Bank of Ghana (BOG), Gross International Reserves (GIR) rose to US$8.4bn, equivalent of 4 months of import cover, at the end of December 2019, from US$7.0bn (3.6 months of import cover) at the end of 2018. Net International Reserves stood at US$5.2bn at the end of 2019, up from US$3.9bn at the end of 2018.

 

Fig. 9: Central Bank Reserves (US$’bn)

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

 

03 Outlook

 

 

Fears of a slowdown in global growth have deepened due to the fast-spreading coronavirus. In an attempt to counter the evolving risks to economic growth, we expect Central Banks especially in developed economies to ease their stance in 2020. For Ghana, the monetary policy committee is likely to maintain a neutral stance in 2020 in order to prevent sharp portfolio outflows.

 

The Central Bank recently introduced a second window facility (between 3pm and 4pm) when banks can borrow from the Regulator at the monetary policy rate plus a spread of 500bps (equivalent of 21% currently). The cost of borrowing for this window is higher than the previous (MPR plus 100bps, equivalent of 17%), and has the potential of driving up interbank lending rates as well as lending rates to customers.

Proceeds from the US$3bn Eurobond issued in February is expected to provide the Cedi with some support against the greenback. Dividend payments which will begin in March may slightly pressure the Cedi in the first half of 2020. The major risks to the Cedi’s stability are overspending ahead of the elections which may dampen investor confidence. Also, haven demand for the dollar, resulting from global uncertainty poses some risk to the Cedi’s stability.

Growth in 2020 will pick-up, driven by government spending and increasing extension of credit to the private sector. Some of the sectors to drive growth are the Mining and Quarrying, Construction as well as Information and Communication. The low interest rate environment in developed economies as well as other geopolitical uncertainties will increase demand for safe haven assets and spur on government’s revenue from gold. The slash in benchmark port values will likely weigh on tax revenues in 2020. As in previous years, the main concern will be an underperformance in government revenue relative to targets which will put the country’s fiscal targets at risk.

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

 

The report was put together by the Research Desk of Fidelity Bank Ghana Limited.

 

Disclaimer Policy

All necessary care has been taken in preparing this document. Information contained herein has been derived from sources believed to be accurate and reliable. Fidelity Bank Ghana Limited does not assume responsibility for any error, omission or opinion pressed. Any persons acting on the information or opinion in this document does so at his/her own risk.

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