Investors bullish on 2018

Investors are very upbeat about growth projections and could turn to Ghana for more business, RMB Research’s 2018 outlook on African countries has pointed out.

These investors, especially offshore ones whose appetite for longer dated local currency denominated debt keeps growing, believe that improved economic indicators, fiscal consolidation, rising oil production, and a robust fixed income market, lay the foundation for sustained economic growth.

“Investor preference for longer-dated Ghana bonds remains strong. we expect this narrative to continue in the coming sessions – especially as offshore investors hunt for duration on GH¢ debt.

In fact, the slew of local bond issuances towards the end of 2017 proved to be stronger than expected. This is most likely to due to investors seeking long duration as the market expects further rate cuts,” the outlook noted.

After raising GH¢4.7billion to clear part of the energy debt via ESLA Plc, a special purpose vehicle, government, in the last quarter, raised a total of GH¢5.3billion, half of this being new borrowing and the other half coming from the conversion of Treasury Bills.

They include a new five-year note, and the re-openings of the 2024 seven-year, 2026 10-year and the 2032 15-year local bonds.

“Ghana’s credit strengths include a strong growth outlook compared to the regional average over the next few years, supported by new oil and gas field developments coming on stream and a reduction in external balances,” it added.

Inflation and Monetary Policy

RMB is of the view that lower inflation and the need to stimulate economic growth in the non-oil sector prompted the Bank of Ghana to cut its benchmark policy rate by 100 basis points to 20percent, which saw a total cut of 550 basis points in 2017.

“There are possibly another 300 to 400 basis points left in the cutting cycle. We are still of the opinion that inflation will fall within the bank’s target of 6-10percent in 2018. The MPC is likely to keep rates unchanged in its first meeting of 2018, scheduled for January 20, to assess the festive season’s effect on inflation, before it resumes loosening again through 2018,” it added.

Fiscal Policy

The outlook noted that the reduction of the fiscal deficit and debt re-profiling have helped the debt-to-GDP rate decline to 68.6percent as at September, 2017, from 73percent at the end of 2016.

Importantly, the annual average rate of debt accumulation – of 36percent over the last four years – has dropped to 13.6percent for the 2017 period.

“For 2018, it seems that the government will be playing by its own fiscal rules. It aims to move the fiscal deficit from an expected 6.3percent to 4.5percent, which is within the new 3-5percent deficit target rule of the government. It plans to spend a total of GH¢62billion, which represents 25.7percent of GDP. The planned expenditure include provisions for debt arrears payments, with the shortfall being financed by funds from local and foreign sources, including dollar bonds,” the outlook added.

By pursuing its path of consolidation, RMB believes, government will keep sentiment strong and the currency stable.

It says, however, that “it is up to the private sector to carry the economy by implementing initiatives like the reduction in electricity tariffs for residential and industrials.”

“We believe that the latest budget plans are achievable – not just because of additional revenue from crude exports, but because the government is well aware of both the risks of further fiscal slippages and the adverse effect they could have on debt dynamics. Ghana still faces high financing costs in both its domestic and external markets,” the outlook noted.

Foreign exchange

Foreign exchange reserves have remained relatively healthy at around four months of import cover and, together with the COCOBOD loan agreement of US$1.3billion.

This, RMB said, gives the Central Bank enough armoury to cushion the local currency in the face of any significant weakening pressures.

Over the longer term, it sees the cedi being supported by improved terms of trade. “But this is also the biggest risk to our currency view should global oil prices plunge unexpectedly. Another key risk, but not our core view, is that of aggressive monetary policy hikes in the developed markets.”