Risk drivers and outlook

Facts & figures

Pros

  • Stable political climate with democratic tradition
  • Relatively diversified endowments
  • Strong growth potential
  • Access to international financial markets

Cons

  • Weak fiscal discipline
  • Concerns about public debt sustainability
  • Structural twin deficit
  • Infrastructure gaps

Head of State

  • President Nana Akufo-Addo

Next general elections

  • December 2020

Population

  • 28.2 m

Income per capita

  • USD 1,380

Income group

  • Lower middle income

Main export products

  • Gold (27.6% of current account receipts), cocoa beans and products (14.5%), oil (7.6%)

Country risk assessment

Solid democratic credentials come with loose fiscal discipline 

Ghana is one of the most stable countries in the region and experienced successive peaceful power transfers between its two major democratic parties, the National Democratic Congress (NDC) and New Patriotic Party (NPP). The NPP won the 2016 elections rather convincingly as the preceding NDC government got burned by corruption scandals, poor economic performance and a severe power crisis. A major weakness of Ghana’s democratic process is the recurrence of policy slippages and pronounced overspending in election years. Also in 2016, this contributed to large imbalances.

Even though Ghana has been stable for years, there are elements that should not be underestimated when assessing the risk of political instability. First, the persistent increase of living costs and the frozen public-sector wages raise the risk of large strikes and social unrest. Secondly, since Ghana’s oil production took off in 2011, so too did the scope for mismanagement. In fact, corruption has become a growing concern as Ghana’s 2017 corruption index from Transparency International deteriorated for the third year in a row, although the country is still better ranked than the regional average (12th out of 49 Sub-Saharan African countries). Lastly, just like in many other coastal West African countries, there is a dynamic of polarisation between Northern-Muslims and Southern-Christians. Moreover, given the country’s involvement in the fight against regional jihadists and the presence of Western interests, Ghana has also become a target for jihadist groups based in the Sahel.

Recovering from years of weak macroeconomic performance

The collapse of international oil prices, together with years of recurrent fiscal policy slippages, power crisis and technical problems at the offshore Jubilee oil field, worsened the country’s economic and financial fundamentals between 2013 and 2016. The economic context has improved over the course of 2017, driven by an increase in oil and gas production and the implementation of a more ambitious economic policy agenda. GDP growth expectations accelerated to almost 9% for 2018 and 6% for 2019, thanks to a near doubling of the oil output after new oil fields came online. Moreover, oil prices are likely to balance around USD 60 per barrel again. The proportion of non-oil growth is also picking-up thanks to the government’s focus on industrialisation in accordance with certain pro-business reforms and a more reliable power supply.

The cedi value halved since the end of 2013 and it has managed to stabilise as from the end of 2017 thanks to higher hard currency oil export revenues and the ongoing backing of the IMF, which supports general confidence. Even so, the Ghanaian currency remains exposed to seasonal and political vulnerabilities. Inflation has been following a declining trend since 2017 after it reached a yearly average of more than 16% between 2014 and 2016. Thanks to targeted monetary policies, inflation should have fallen to 10% by the end of 2017 and might lower to 8% by the end of 2018. 

Thanks to recovering exports (oil and gold), the current account deficit should narrow further to 5.4% of GDP in 2018, coming from an average deficit of 8% of GDP between 2014 and 2016. Besides, there are no more financing shortfalls expected on the external balance of payments, mainly explained by higher portfolio investment inflows (Eurobonds) that will continue to bolster foreign exchange reserves held by the central bank. In fact, reserves are at their highest level since 2012 and reached 3.2 months of import cover in November 2017. However, these bond issuances have led to swelling total external debt levels. Still, Ghana’s considerable GDP growth performance should help lower external debt ratios (public and private) from 55% of GDP in 2017 to around 50% in 2019. On the downside, debt service ratios touched painful levels of approximately 20% of the current account receipts in 2017 and are estimated to remain around this level in the forthcoming years due to unfavourable external lending conditions that have become increasingly less concessional.

Fragile public finances are key risk factor

The IMF’s Debt Sustainability Analysis of September 2017 confirmed Ghana’s status as a ‘high risk of debt distress’ country. Undeniably, Ghana’s foremost risks relate to the fiscal situation. The budget deficit reached an average of 11% of GDP between 2012 and 2014, before moderating somewhat in 2015 accordant with the engagements of its 3-year IMF support programme (2015-2018). However, since 2016 was an election year, the budget derailed again to about -9% of GDP in 2016. Public payment arrears to domestic contractors accumulated (3.8% of GDP by the end of 2016) and the government turned out to face significant contingent liabilities from troubled energy state-owned enterprises and the financial sector. As a result, Ghana’s public debt stock amassed to 74% of GDP in 2016, coming from merely 26% of GDP after HIPC debt relief in 2006. Although government revenues remained relatively stable, though confined to around 17%-18% of GDP, interest payments soared and eventually absorbed an untenable 42% of public revenues in 2016. The enormous interest burden on Ghana’s budget is probably the country’s major weakness, explained by deficient debt management and costly domestic borrowing conditions marked by short maturities and high interest rates (25% in 2016). Under Ghana’s public debt strategy, the domestic debt stock is gradually being rolled-over with longer maturity debts and external borrowing – which has become more easily accessible. Ghana’s 2016 Eurobond sold at a significant yield of 9.25% and the country is planning its sixth Eurobond sale in April 2018 (USD 1 billion).  The yields on local currency bonds bought by international investors still reach staggering levels (for example 19.5% after a sale in November 2017). Obviously, this raises the external debt service burden while public interest payments are expected to seize 36% and 33% of public revenues in 2018 and 2019 respectively. Government borrowing decisions still create uncertainty on whether the country will meet its debt management targets under the IMF programme, set to prevent debt distress and restore public debt sustainability.

In 2017, tighter fiscal policies (like broadening tax base and compliance) and business-enhancing reforms were introduced. This should have confined the 2017 budget deficit to about 6% of GDP, the lowest level in six years. If fiscal consolidation efforts continue, the deficit could even drop below 4% of GDP in 2018, putting the public debt stock on a falling trend.  Nonetheless, the interest burden is likely to remain heavy over the next few years. The extension of the IMF’s financial support programme to April 2019 should help ease debt distress concerns, assisted by strong economic activity and increased export returns. Hence, even though challenges remain great for Ghana’s public finances, the country is showing important signs of recovery. The main risks that could derail progress are another sharp fall in oil prices, setbacks in oil output, loosened fiscal discipline and negative sentiments of the international financial market towards Ghana or towards frontier markets in general.