Little confirmed covid-19 infections but pandemic hurts through other transmission channels

According to data from John Hopkins, 195 people have been confirmed to be infected with covid-19 in Ghana as of 1 April. Though this is a relatively low level, it is likely to be underestimated and the health care system has limited capacity to cope with a large outbreak. To contain the spread of the virus, the sub-Saharan country has already issued a ban on large gatherings and a two-week lockdown in its biggest cities. Nevertheless, harsh lockdown measures such as those witnessed in Europe and China are not likely to be effectively implemented, especially in densely populated and poor areas. Furthermore, tight restrictions over longer periods would likely increase violence, especially if the elections of December 2020 are significantly delayed.

The outbreak of the covid-19 pandemic in the world is having large repercussions on emerging markets. The main transition channels are the drop in commodity prices, the fall in remittances and tourism revenues, the drop in external demand, the disruption of the supply chain, border closures and the sharp deterioration of global financial conditions. As an emerging country and oil exporter, Ghana is particularly hit. The impact is likely to be especially severe in the short term. However, depending on the length and severity of the covid-19 crisis both worldwide and in Ghana, the policy responses and the oil price war between Saudi Arabia and Russia, the macro-economic fundamentals could be hit hard in the medium term as well.

Pandemic and oil price shock might push Ghana into recession 

In December 2019, the IMF estimated a real GDP growth of 5.8% for 2020, a bit lower than the real GDP growth average of 7% in the past 3 years. However, this economic growth forecast will be severely challenged in 2020, as the country is hit by the global economic fallout from the coronavirus and the low oil prices. The expected economic slowdown will also dent non-oil growth and investment flows, hurting the whole economy. Ghana’s finance minister expects a real GDP growth of 1.5% this year in the worst-case scenario; that would be the lowest real GDP growth in 37 years. Nonetheless, the economic growth forecast is highly uncertain given the current context and a recession is also possible.

The Ghanaian currency has always been prone to vulnerabilities related to seasonal and political factors. The Ghanaian cedi has lost about 10% of its value vis-à-vis the USD in the past year (last observation date 31/03/20, year-on-year) due to the oil price shock and the worldwide covid-19 crisis. On top of that, in order to support the economy, the central bank has been cutting its interest rate to its lowest level in 8 years (instead of tackling inflation). Unsurprisingly, the cedi dipped close to its weakest level on record and is likely to remain under pressure. Given this context, inflation is likely to be higher than the previously forecasted annual average of 7.5% in 2020, raising import and living costs.

To avoid a balance of payment crisis, Ghana requests financial assistance from World Bank and IMF

Oil accounted for about 20% of export revenues in Ghana in 2018. As the price of the Brent barrel tumbled down to less than 25 USD, the lowest level since 2002 and nearly half of the projected oil price for 2020, export revenues from oil are expected to significantly decrease. Cocoa, another important export product of Ghana that accounted for 10% of current account receipts in 2018, saw its prices decrease by about 10%, further hurting export revenues. Remittances (which accounted for about 11% of current account receipts in 2018) and tourism revenues (of lesser importance, as they only accounted for 4% of current account receipts in 2018) will likely fall as well. A large decrease of Ghana’s current account receipts is therefore in the cards. Indeed, despite the 15% rise in the average gold price in the past months vis-à-vis 2019 (accounting for roughly 23% of export revenues in 2018), it is not expected to reverse the negative trend in export revenues. Hence, Ghana is likely to experience a wide current account deficit in 2020, significantly higher than the previous forecast of around -4% of GDP. On top of that, FDI and portfolio inflows, the two main sources of financing of the current account deficit, are likely to drop because of the large outflow of capital from emerging markets. Shortfalls are likely to occur in this scenario, which can result in external payment difficulties. Given this context, it is no surprise Ghana requested an external assistance of about USD 540 million to the IMF to avoid a possible balance of payment crisis. The government also asked financing to the World Bank. Even if both international financial institutions (IFIs) are likely to come forward with the financing, it might take months before financial markets calm down and external financing from the markets become available again to Ghana (and other emerging markets).

The external debt stood at around 50% of GDP at the end of 2019, its highest level since debt relief in 2006. Before the covid-19 crisis and the oil price shock, the external debt had already been expected to slightly rise in the following years. With the lower GDP growth, the fall in external revenues and external loans from the IMF and the World Bank, the external debt ratio is likely to rise rapidly this year. On top of that, external debt service ratios had already reached relatively painful levels of approximately 20% of current account receipts in 2019. Indeed, since Ghana reached lower-middle income status and has limited access to concessional financing, it has been issuing Eurobonds, raising debt service. As financial markets are fleeing to safer havens, external interest payments and the external debt service are likely to be rising. Gross foreign exchange reserves stand at their highest historical nominal value; nonetheless, they merely reached the adequate level of 3 months of import cover in December 2019. The exchange rate is de facto and de jure floating, somewhat lowering the risk of a sharp fall in foreign exchange reserves. That being said, given the fall in external revenues and the elevated external debt service, there will be pressure on the foreign exchange reserves as long as financing from the IFIs doesn’t come forward.

Public finances are a sour point

Politically, Ghana is one of the most stable countries in the region. It experiences peaceful power transfers between the two major parties – the National Democratic Congress (NDC) and the New Patriotic Party (NPP). The 2016 elections were won rather convincingly by the NPP (President Nana Akufo-Addo). The next elections are expected to be held in December 2020. As has been seen in the past, (large) fiscal slippages could occur during the run-up to the elections. However, as the government requested external assistance to the IMF under the emergency financial tool, the IMF programme is likely to focus on fiscal consolidation, reducing to some extent the risk of fiscal slippages. That being said, a large fiscal deficit due to lower economic growth and oil revenues (accounting for about 10% of public revenues) is to be expected in 2020 even as the government is adopting ‘extraordinary measures’ such as a deferral of interest payments on non-marketable bonds. In this context, the enormous interest burden of the public sector, which already accounted for 40% of public revenues before financial markets lost their appetite for emerging markets bonds, is to be noted. Public debt is thus likely to rise despite Ghana already being at ‘high risk of debt distress’, according to the IMF. Indeed, at the end of 2019, the public debt stood at an elevated level of 67% of GDP and represented 450% of public revenues, a relatively high level. Moreover, the IMF and the World Bank have called on all official bilateral creditors to suspend debt payments from IDA countries that request forbearance. As Ghana is an IDA country and as its public debt service is quite high, a request for the suspension of debt payments to bilateral creditors (and not to the private market) is possible.

Analyst: Jolyn Debuysscher – j.debuysscher@credendo.com