Insight: Ghana’s Financial, Fiscal Strain May Be Worsening

(Bloomberg Intelligence) -- Continued fiscal and monetary tightening in Ghana is likely to hold back economic growth to the low single digits for the third year in a row. The outlook could deteriorate further into 2017 with increasing strain on the corporate and banking sectors, as illustrated by the sharp uptick in non-performing loans in April.

A recovery in mining and quarrying lifted real GDP growth to 4.9% year over year in 4Q15, after readings of 3.3-3.7% in the previous three quarters. Full-year growth of 3.9% in 2015 was only marginally below the 4.0% outturn in 2014 but still marked the weakest pace in 15 years. Growth in 2016 is unlikely to be much stronger and may even be worse, as fiscal and monetary conditions are tightened further.While increased oil production should provide a boost next year, stricter lending conditions and rising non-performing loans are becoming a more prominent threat to economic growth.

Much of the slowdown in growth in 2014-2015 from an average of 7.4% in 2003-2013 was due to tighter fiscal and monetary policy. Fiscal belt-tightening has been required after the deficit widened to 12% of GDP in 2012, when the latest parliamentary and presidential elections were held.

It is estimated to have come in at 6.7% in 2015 and the government is targeting a 4.8% shortfall in 2016, with an election in November. Officials are also clearing arrears amounting to 1.4% of GDP. However, lower-than-anticipated oil revenue and an unconducive market for issuing a planned $1 billion Eurobond could force further expenditure cuts, with repercussions for economic activity.

The government has pledged to offset any revenue shortfall emanating from the oil price assumption of $53 per barrel in the 2016 budget, which may be needed given that the spot price of Brent crude has averaged about $38 per barrel so far this year. In addition, an outage in the Jubilee oil field March 20-May 3 means that oil production is likely to come in below the 106,000 barrels per day projected in the budget, dealing another blow to the government’s revenue assumptions.

Planned Eurobond Issue Could Leave Financing Gap

Another challenge to the public finances comes from the government’s plans to cover more than a third of its total borrowing requirement though a Eurobond issue, though market conditions having become considerably more challenging in the past year. Ghana’s most recent Eurobond offering in October was issued at a yield of 10.75%, even with a World Bank guarantee for $400 million of the $1 billion issued.

With no external guarantee in place and with Ghana’s public debt having risen to 71.4% of GDP in December 2015, it can’t be taken for granted that the government will find enough buyers for its new offering.

A failure to issue a Eurobond would leave a $750 million hole in the 2016 budget ($250 million of the bond proceeds are to be used to repay debt). It could be expensive to fill.The Treasury is already paying interest rates close to 25% on bills and bonds in the domestic market. This means that the government would likely need to reduce the budget deficit beyond the targeted net borrowing of 4.8% of GDP this year, if the Eurobond market remains closed for Ghana.

Banks Under Pressure From Rising Non-Performing Loan

In addition to fiscal consolidation, monetary tightening has weighed on growth in recent years, with the central bank raising its policy rate to 26.00% in November from 12.50% in February 2012 in response to a weakening cedi and rising inflation. While the central bank has left its policy rate unchanged so far in 2016 (its latest meeting was on May 16), monetary conditions have tightened further. Commercial bank rates increased sharply in April to 32.1% from 28.6% in March.

The pickup in rates probably reflects the need for banks to boost their net interest margins and profitability, with non-performing loans rising to 16.2% of the total in March from 14.6% in January and 11.6% in April 2015. Annual private-sector credit growth has slowed to 11.2% in March, from 36.4% a year earlier. The Bank of Ghana is reportedly now giving liquidity support to some lenders, as rising non-performing loans are constraining their operations. This might indicate the beginning of a negative cycle of increased loan defaults, prompting stricter lending conditions, higher interest rates and vice versa, which could further damage Ghana’s growth prospects over 2016 and 2017.