Rand Merchant Bank (RMB), the corporate and investment banking arm of First National Bank, projects that a combination of exceptional services sector growth, a faster than expected rate of vaccinations, and higher than expected oil prices are to fuel economic growth in Ghana to pre-COVID-19 levels. This is on the back of 3.3% growth y/y in the fourth quarter of 2020.
The bullish scenario pegs growth at 5.5%. Having avoided a recession in 2020, the economy is expected to continue growing in 2021 with the base case at 4.2% as exports increase and consumer activity improves.
Neville Mandimika, Economist and Fixed Income Analyst in charge of Africa at RMB, has cautioned that delays to the vaccine roll-out and the threat of another lockdown are likely to dampen the recovery. “The bearish outlook for growth would then be 2.0%.”
Inflation is expected to increase as economic activity picks up, with the inflation rate at 10.5%; marginally above the Bank of Ghana’s target band. The Bank of Ghana is then expected to hike rates to anchor inflation expectations.
“However, the base case is that inflation will moderate to 9.0%, which would then mean no interest rate cuts in 2021 as the economy shows signs of improvement while inflation remains contained,” Mandimika expects. The bearish outlook is for inflation to be pushed down to the lower end of the inflation target band of 6% – 10% due to lack of aggregate demand.
Improved economic growth would boost revenue generation, but the deficit remains outside the threshold of minus 5% of GDP. And as economic growth picks up and expenditure is contained, the fiscal deficit narrows from 2020 levels to -9.6%. Funding needs escalation beyond projected weak revenue collections due to a protracted economic slowdown.
The sizable Eurobond issuance during 2021 bolstered the cedi. However, the twin deficits continue to exert moderate pressure on the currency; but the pace of depreciation is capped due to the sizeable portfolio inflows Ghana is expected to enjoy in 2021.
“The economy recorded 0.4% full-year growth in 2020, which was softer than our expectations, but a relatively brief lockdown of three weeks helped in avoiding a recession,” Mandimika says. Most sectors registered growth for the year, but lacklustre performance in the hotel and restaurant sector (3% of GDP) nearly offset the notable gains in other sectors.
The oil sector contracted 7.4% last year compared to the 15% growth in 2019, while mining and quarrying (mainly gold) registered an 11% contraction – with both suffering from drops in production and weaker resources prices.
“Recovery from the COVID-19 pandemic is dependent on strengthening the sectors which can quickly stabilise the human capital, and then further mobilise the resources relevant to stimulating the economy. Surely, gains of the oil market, mining and other essential services will benefit Ghana greatly,” added Dominic Adu, Chief Executive Officer of First National Bank Ghana.
Information and communications sectors registered 23%, benefitting from people working at home, and cocoa 33%. “We expect growth at 4.2% in 2021 with the services sector, to recoup some of the losses made during the pandemic,” concludes Mandimika.