Dutch Disease fears
The drop in the value of the cedi over the past two months is attributed to a shortage of dollars due to the Bank of Ghana’s absence in the foreign exchange market as a seller of dollars since late December 2010. The hiatus since the last bond auction, in October 2010, has also been longer than usual, which implies that Ghana has not had an injection of portfolio inflows in a few months. These developments, which coincide with the commencement of oil production in the country, are in accordance with some officials’ bias for a weak cedi to counter the potential Dutch Disease effects of a commodity exporter. Ghana’s uncompetitive manufacturing sector is especially at risk from a strong cedi. A smaller current account deficit in 2011, owing to the projected 40-50%
Increase in export earnings and fall-off in some big-ticket capital equipment imports, which are required for the commencement of oil production, suggests that the cedi will retrace some of its value in 2011. However, the bias towards a weak cedi is likely to counter any strengthening tendencies. We thus project a moderate depreciation of the cedi to an average of $/GHS1.45 in 2011, from $/GHS1.43 in 2010.
The debut of oil to propel growth into the double-digit region
2011 will be the first full year of oil production in Ghana following its commencement on 15 December 2010. Production is expected to reach 120,000 bpd in 2011. Compared with 2.5mn bpd in Nigeria, Ghana’s oil production may be low but it promises to be an important export (8-10% of GDP) and new source of tax revenue (1% of GDP). Projections put oil production at 17% of non-oil GDP. Moreover, the sector will boost the demand for services. Ahead of the commencement of oil production the business services sector, including ICT, financial services and commerce, and the hospitality sector exhibited strong growth in 2010. This is expected to continue in 2011, with the striking of first oil expected to propel real GDP growth to 10.5% in 2011, from 6.6% in 2010, before moderating to 7.1% in 2012.
Credit growth to strengthen
The recovery of credit growth is expected to continue in 2011 on the back of lower interest rates, a decrease in the nonperforming loans (NPL) ratio and strengthening economic activity. The average lending rate decreased to 27.6% in November 2010, from 32.8% a year earlier, thus easing the cost of capital. Moreover, the government has cleared some of its arrears, which partly helped lower NPLs to 18.1% in September 2010 from 20% in February 2010. The improvement in credit growth that began in mid-2010 stemmed from the recovery of international trade and industrial production. In particular, credit extended to exporters and importers grew by 77% YoY and 30% YoY, respectively. The construction sector, which was the worst hit by unpaid government contracts, is expected to stage a recovery in 2011. This is positive for lenders because pre-crisis almost 10% of credit went to construction.
The return of double-digit inflation
Inflation has been on an almost two year decline on the back of good levels of rainfall, tighter fiscal policy, softer commodity prices and a stable cedi. However, it has hit bottom and is set to increase in 2011, after coming down nicely to a two-decade low of 8.6% YoY in December 2010. Inflationary pressures will mainly stem from non-food inflation, particularly energy prices. In early January 2011, the government announced a 30% increase in the fuel price, in accordance with the higher international oil price. A stronger oil price will translate into higher transport and distribution costs. Moreover, the surge in global food prices will feed into local food inflation. Up to 80% of the rice consumed in Ghana is imported. We expect inflation to fall back into the double-digit realm and end 2011 at 11.5-12.0% YoY. If inflation proves stronger than our projection, monetary policy will be tightened.
By Kim Polley
Director, Southern Africa
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