African Reserves

As bottle pressing brews in Ghana, all macros turn red

The Russian-Ukrainian war is wreaking havoc around the world and perhaps the effect is greater than ever in emerging African markets, such as Ghana, as ever imagined.

Ghana, a leading Anglophone economy in the sub-region, faces new realities beyond the pandemic-induced crisis and rapidly changing trade dynamics with warring Russia and Ukraine. Although more than a quarter of Ghana’s cereal imports, mainly wheat flour, come from Russia and around 60% of steel imports come from Ukraine, current inflation is driven more by structural factors. local than by externalities.

At a time of high commodity prices, especially oil, gold and cocoa which Ghana boasts of exporting, the local currency, the Ghana cedi, continues to depreciate, fueling inflationary pressures and undermining the sentiment of the monetary policy authorities towards the stimulation of productive activities in the country. the real sector.

Since the beginning of the year, the cedi has lost 19% of its value, closing at 7.1441 GHC/USD on May 31, 2022, against 6.0061 GHC/USD on December 31, 2021.

As Abiola Rasaq, a financial analyst and former economist at United Bank for Africa Plc, puts it, “Ghana’s challenges are indeed multifaceted and endemic. While COVID-induced social and fiscal challenges have masked structural issues for the past two years, the realities unfolding in this nature-endowed nation reflect deep-rooted local social and economic issues that cannot be addressed. resolved overnight. More so, the surgery would require leaders to demonstrate their intellectual capacity to effectively manage resources, including human capital, in order to implement tangible social and economic reforms.

Ghana may be back in the era of high inflation when stubborn inflationary pressure and the depreciation of the cedi forced a regime of high interest rates, such as in 2014 when the central bank raised the key rate of 200 basis points, from 19% to 21%. hundred.

On June 1, 2022, the government issued 14-day treasuries 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 represents a premium of around 200 basis points compared to what the government was offering at the end of March 2022, reflecting the impact of the 200 basis point hike in the key rate to 19.0 % in May by the Monetary Policy Committee. Headline inflation hit 23.6% in April 2022, and if the MPC is correct, there may be no respite from rapidly rising consumer goods prices in the near term, as the bank reiterated. central bank, the Bank of Ghana (BoG).

“The bank’s latest forecast shows a continued high inflation profile in the near term, with an extended horizon for inflation to return to the target range.”

Indeed, rising food and fuel prices and the disruption of global supply chains are adding to inflationary pressures around the world. It’s even worse for economies like Ghana, which depend on Chinese imports. Notably, Chinese goods and services account for more than 18% of Ghana’s imports. Therefore, structural transition and rising wages in China could continue to inflate the costs of landing consumer staples and intermediate raw materials in Ghana.

Worrying signal sign from Ghana’s macros, in a cycle of high commodity prices, the country’s current account remains negative, posting at -3.1% of GDP in December 2021, although financial flows from the capital ensured a positive balance of payments.

Net international reserves continue to plummet from a recent peak of $11.3 billion in March 2021, when the country raised $3 billion in the international debt capital market, to just $8.34 billion. dollars 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 other choice. than to be hawkish, especially as the euro sovereign bond now trades at a yield above 22% at maturity, thus undermining the Ghanaian government’s prospect of tapping into the international debt market to finance the short-term budget deficit.

Early last week, the fall in Eurobond prices resumed with greater force. On Tuesday, May 31, all Ghana bonds maturing between 2025 and 2035 fell in price. Of the 10 bonds maturing during the period, six of them (those maturing between 2025 and 2029) had yields of at least 20%.

The $750 million bond maturing in March 2027 with a coupon of 7.875%, had the highest yield of 22.23% and a price of 64.

On the same day, all of Nigeria’s Eurobonds except the $500m asset maturing this month (June) were hit, with all 13 of them falling in price . Consequently, their yields increased. Even then, the highest yield of any Nigerian asset was 11.41%, for the $750 million bond due January 2049, with a coupon of 9.248% and a current price of 82.

The possible implication is that Ghana must rely on domestic financing for now, which means that local rates will continue to rise, with an adverse effect on private sector lending and broader productivity.

Moreover, the government is already heavily focused on some 80% of GDP, while credit to the private sector represents barely 11% of the country’s GDP. Moreover, the high cost of borrowing would further weaken the fiscal balance, with debt servicing potentially representing around 60% of current year revenue in a baseline scenario.

The 364-day bill was issued at a yield of 24.46% at the last auction and fundamentals suggest the government should pay more premium to fund its budget deficit in the second half, especially that it must stem the rise in exchange rates. and domestic portfolio outflows.

AZA, Africa’s largest non-bank FX broker by trading volume, supporting more than $1 billion a year in foreign exchange liquidity on the continent, told its client in an email note. email; “This week’s rate hike by the BoG followed a huge 250 basis point hike in March, which was the largest in its history, but this move may not be enough to protect the currency from further pressure. ”

According to brokerage FX, “we expect the cedi to weaken in the coming days as investors continue to turn away from Ghanaian assets,” it said in a note to clients on Thursday. May 26, 2022.

Ghana is not alone in tightening its interest rate policy; Nigeria’s Monetary Policy Committee also raised the benchmark interest rate by 150 basis points to 13% at its May meeting. This is not as high as that of Ghana, which has raised its interest rate by 550 basis points since October 2021, from 13.5%.

While the economy grew by 5.4% in 2021, the latest reports show that business and consumer confidence has eased in part due to rising fuel prices and transportation costs, rising inflation and currency depreciation, which dampen all levels of productivity and negatively impact production prospects. in all industries.

The government recently acknowledged the need to revise down its forecast for economic growth of 5.8% this year, given the current realities of the economy.

Some analysts believe GDP growth in 2021 was a rebound from the 37-year low GDP growth of 0.5% recorded in 2020, following the devastation caused by the COVID-19 pandemic.

The banking sector, although well capitalized with a solvency ratio of 21.3% (against a prudential requirement of 13.0%), thanks to the sector recapitalization reform of 2014/2015, remains fragile.

Non-performing loans remain stubbornly high, although they moderated to 14.3% in April, from their peak of 17.3% in August 2021. However, the impact of restructured loans on measures of loan quality assets raises concerns, especially since the decline in the delinquency rate has also been partly distorted by the modest growth of the credit portfolio.