The Russia-Ukraine war is taking a toll on the world and perhaps the effect is more on emerging African markets, like Ghana, than ever imagined.
Ghana, a prominent Anglophone economy in the sub-region is facing new realities beyond pandemic-induced crisis and fast-changing trade dynamics with the warring Russia and Ukraine. Though more than a quarter of Ghana’s grain imports, mainly wheat flour, is from Russia and about 60% of steel import is from Ukraine, the current inflation is more induced by local structural factors than the externalities.
At a time of high commodity prices, especially oil, gold, and cocoa which Ghana boasts of exporting, the local currency, the Ghanaian cedi, continues to depreciate, fuelling inflationary pressures and undermining the sentiment of the monetary policy authorities toward stimulating productive activities in the real sector.
Year-to-date, the cedi has lost 19% of its value, closing at GHC7.1441/USD on 31 May 2022, compared to GHC6.0061/USD on 31 December 2021.
As Abiola Rasaq, a financial analyst and former Economist at United Bank for Africa Plc puts it, “the challenges of Ghana are indeed multifaceted and endemic. Whilst the COVID-induced social and fiscal challenges masked the structural issues in the past two years, the unfolding realities in this nature-endowed country are reflections of deep-rooted local social and economic issues that cannot be fixed overnight. More so, the surgery would require the leadership to manifest intellectual capacity to effectively manage resources, including human capital, towards executing tangible social and economic reforms.”
Ghana is perhaps back to the high inflation rate era when obstinate inflationary pressure and cedi depreciation forced a high-interest rate regime, such as in 2014, when the central bank raised the monetary policy rate by 200 basis points from 19 per cent to 21 per cent.
On June 1, 2022, the government issued 14-day treasures at 19.0%, reinforcing the crowding-out effect of public sector borrowing on private credit in the system.
The yield on the 14-day treasury note is some 200 basis points premium to what the government offered at the end of March 2022, reflecting the impact of May’s 200 basis point hike in the policy rate to 19.0%, by the Monetary Policy Committee. Headline inflation spiked to 23.6% in April 2022, and if the MPC is right, there may be no respite to the fast-rising consumer goods prices in the near term, as the country’s central bank, the Bank of Ghana (BoG) reiterated.
“The bank’s latest forecast shows a continued elevated inflation profile in the near term, with a prolonged horizon for inflation to return to the target band.”
Indeed, rising food and fuel prices, and disruption to global supply chains are aggravating inflationary pressures across the world. It’s even worse for economies like Ghana, which depends on Chinese imports. Notably, Chinese products and services represent over 18% of Ghana’s imports, hence the structural transition and wage rise in China may continue to balloon the landing costs of staple consumer goods and intermediate raw materials in Ghana.
As a sign of worrying signal of Ghana’s macros, in a high commodity price cycle, the country’s current account remains negative, printing at -3.1% of GDP in December 2021, although financial flows from the capital account ensured a positive balance of payment.
The net international reserves continue to collapse from a recent peak of USD11.3 billion in March 2021, when the country raised USD3bn in the international debt capital market, to barely USD8.34bn in April 2022. The reserve can barely cover 3.7 months of the country’s imports.
Rasaq noted that “the situation in Ghana is a double whammy of escalating inflation and currency volatility and in such a situation the monetary policy authority has little or no option than to be hawkish, especially as the Sovereign Eurobond now trades in excess of 22% yield to maturity, thus undermining the prospect of the Ghanaian government to tap the international debt market to fund budget deficit over the near term.
By early last week, the crash in Eurobond prices resumed with a greater force. On Tuesday, May 31, all of Ghana’s bonds maturing between 2025 and 2035 fell in price. Of the 10 bonds maturing within the period, six of them (those maturing between 2025 and 2029) had yields of at least 20 per cent.
The $750m bonds due in March 2027 with a coupon of 7.875 per cent, had the highest yield of 22.23 per cent, and a price of 64.
On the same day, all of Nigeria’s Eurobonds, except the $500m asset maturing this month (June) took a hit, with all 13 of them falling in price. Consequently, their yields rose. Even then, the highest yield on any Nigerian asset was 11.41 per cent, for the $750m bonds due in January 2049, with a coupon of 9.248 per cent and a current price of 82.
The possible implication is that Ghana has to rely on domestic financing for now and that means local rates would continue to rise, with a counteractive impact on private-sector lending and broader productivity.
Incidentally, the government is already highly geared at some 80% of GDP, compared to private sector credit, which is barely 11% of the country’s GDP. More so, the elevated cost of borrowing would further weaken the fiscal balance, with the expectation that debt service may be some 60% of revenue in the current year on a base case scenario.
The 364-day bill was issued at a yield of 24.46% at the last auction and the fundamentals suggest the government would need to pay more premium to fund its budget deficit in the second half of the year, especially as it needs to stem rising foreign and domestic portfolio outflows.”
AZA, Africa’s largest non-bank currency broker by trading volume, supporting over $1 billion annually in foreign currency liquidity on the continent, says to its client in an email note; “This week’s rate increase by the BoG followed a whopping 250 basis point jack up in March, which was the largest in its history but the move may not be enough to shield the currency from further pressures.”
According to the FX brokerage house, “we expect the cedi to weaken in the coming days as investors continue to shy away from Ghanaian assets,” it said in a note to its clients on Thursday, 26 May 2022.
Ghana is not alone in tightening interest rate policy; the Monetary Policy Committee in Nigeria also hiked the benchmark interest rate by 150 basis points to 13% at its meeting in May. This is not as steep as Ghana’s, which has hiked its interest rate by 550 basis points since October 2021 from 13.5%.
While the economy grew 5.4% in 2021, the latest reports show that business and consumer sentiment have eased due partly to increases in fuel prices and transportation costs, rising inflation and currency depreciation, all of which are dampening productivity levels and adversely impacting prospects for outputs across all industries.
The government recently acknowledged the need for a downward revision of its forecast for the economy to grow 5.8% this year, given the current realities of the economy.
Some analysts think the 2021 GDP growth was a dead cat bounce from the 37-year low GDP growth of 0.5% recorded in 2020, following the havoc wreaked by the COVID-19 pandemic.
The banking sector, though well-capitalised with a capital adequacy ratio of 21.3% (compared to a prudential requirement of 13.0%), on the back of the 2014/2015 sector-wide recapitalisation reform, remains fragile.
Non-performing loans remain stubbornly high, although it moderated to 14.3% in April, from their peak of 17.3% in August 2021. However, there are concerns about the impact of restructured loans on the asset quality metrics, especially as the decline in the delinquent ratio was also partly distorted by the modest growth in the credit portfolio.
