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ACCRA (Capital Markets in Africa) – Ghana’s much-anticipated return to macroeconomic stability started to materialize in 2016, on the back of the ongoing fiscal adjustment program with the IMF and its associated front-loaded fiscal measures implemented since April 2015. The most notable indication of emerging macroeconomic stability in 2016 was observed in the foreign exchange market where the Ghana Cedi recorded a relatively more stable outturn against the major international trading currencies. The Cedi’s improved performance was anchored on continued tight monetary stance, sustained fiscal consolidation, eliminating deficit financing from the central bank, and improved offshore demand for treasury debt securities. Notwithstanding the threat of a relapse in Q4-2016 (due to heightened import demand for the yuletide and political uncertainty), the Cedi closed 2016 with an annual depreciation of 9.65%, the lowest rate since 2011.
The elevated cost-push pressures in Q1-2016 (and associated inflation uncertainty) resulted in dramatic swings in the consumer price inflation rate for the most part of 2016 before easing in Q4-2016, supported by improved food harvest and diminishing cost pressures. Ghana commenced 2016 with a surge in headline inflation rate to 19% in Jan-2016 (Dec-2015: 17.7%) with volatility during the year before easing to 15.4% in Dec-2016.
The observed inflation trend in 2016 indicates that future inflation path would be largely determined by non-food inflation (which is affected by cost dynamics) and an appropriate monetary policy stance. Following nine months of elevated yields for treasury bills, a downturn in yields was observed in Q4-2016 as inflationary pressures diminished and government borrowing appetite eased amidst heightened Ghana Cedi (GHS) liquidity.
Asset quality in the Ghanaian banking industry deteriorated in 2016 as reflected by a 550bps year-on-year increase in the Non-Performing Loans (NPLs) ratio to 19% as at the end of Sep-2016. The surge in the NPLs ratio was partly due to the challenging macroeconomic environment endured by businesses over the past 3 years which weighed down on their bottom line and debt repayment capacity. Aside from the fundamental rise in the NPL ratio, a stricter reporting standard instituted by the central bank partially contributed to the high NPLs. The stricter reporting standard ensured that a substantial amount of overdue debts owed the banking sector by State-Owned Enterprises in the energy sector was subsequently added to the NPLs, hence elevating the risk to banks capital buffer. Consequently, we observed a substantial reduction in the risk appetite as growth in loan portfolio slowed down while investment portfolio (treasury bills and bonds) grew by 47.3% year-on-year to GH¢16.1 billion ($3.98 billion).
Overall, the emerging macroeconomic stability in 2016 (on account of FX stability, diminishing inflation pressures and stabilizing debt-to-GDP ratio) requires sustained consolidation measures to firmly anchor investor and market confidence in 2017. Real GDP Growth momentum over the past four (4) years have remained weak and below the desired trend on account of constrained credit expansion, fiscal consolidation and unanticipated shocks to crude oil production at Ghana’s Jubilee oil field. While sustaining the consolidation of the emerging macroeconomic stability is crucial, a recovery in GDP growth is also necessary for 2017.
“Ghana is expected to grow by 7.5 percent and 8.4 percent in 2017 and 2018 respectively, due to improving fiscal and external positions, says the World Bank Group”
New Administration: The Macroeconomic Prospects in 2017
The year 2016 was concluded with political activities aimed at electing 275 Legislators and an Executive president to oversee Ghana’s macroeconomic prospects over the next four (4) years. Ghana’s keenly contested but generally peaceful elections in December 2016 resulted in a first round decisive victory for the New Patriotic Party (NPP) both at the Legislative and Executive levels. As declared by Ghana’s Electoral Commission on 9th December 2016, the NPP’s Nana Addo Dankwa Akufo-Addo obtained 53.85% of valid votes cast as against the 44.40% garnered by the then incumbent President John Dramani Mahama. While the new NPP-led administration is yet to present a fiscal policy statement for the 2017 fiscal year, we expect the broad framework of macroeconomic policies to be anchored on the party’s manifesto for the 2016 elections. Ghana’s new government expects to build a “business-friendly and people-friendly” economy which hinges on diversified economic growth through value-addition. Ghana’s macroeconomic outlook for 2017, therefore, hinges on the IMF’s policy prescriptions and a gradual roll out of the new government’s fiscal plans, which is underpinned by the following:
Consolidating Macroeconomic Stability: As earlier observed, the emerging macroeconomic stability (from 2016) requires consolidation measures to ensure an entrenched macroeconomic stability that supports a rebound in economic activity. The new administration expects to anchor macroeconomic stability on three main pillars: monetary discipline, fiscal discipline, and financial sector stability. While monetary discipline would be based on the amended Bank of Ghana Act (which grants autonomy to the central bank), a fiscal council and financial stability council is expected to be established. These two bodies are expected to anchor fiscal responsibility and accountability as well as financial sector stability. We expect Acts of Parliament to be passed in support of the mandates of these fiscal and financial stability councils. We view the proposed enactment of Acts as laudable and key to sustaining macroeconomic stability in the medium term.
While we expect that the watchdog role of these councils would ultimately support the institutionalization of macroeconomic stability over the medium to long term, the short-term macroeconomic outlook (especially in 2017) would remain anchored on the ongoing IMF program. Consequently, we expect the new administration to continue with the IMF program until official expiration in Apr-2018 as the proposals for fiscal and financial sector stability should substitute the IMF anchor post Apr-2018.
From Taxation to Production: A major constraint to business activity (besides the weak credit expansion) is the stringent tax regime under the front-loaded fiscal adjustment program since 2015. Following a vigorous political campaign in the 2016 elections which highlighted the increased tax burden on the private sector, the new administration is expected to recalibrate the tax regime in order to provide incentives for productivity and investment. In broad terms, the fiscal policy direction is expected to follow a cautious path with expenditure prioritization that is consistent with the new regime of tax administration. In specific terms, the new government expects to: reduce the corporate tax rate by 500bps to 20%, abolish the 17.5% VAT on fee-based financial services, abolish the 5% VAT on Real Estate sale, abolish the special import levy, review withholding taxes imposed on various sectors (including the mining sector) which has constrained business liquidity and remove import duties on raw materials and machinery for production within the context of the ECOWAS Common External Tariff (CET) protocol.
While we expect these tax incentives to stimulate business productivity and investment with a resultant boost to direct taxes in the medium term, we do not expect an implementation framework which would jeopardize the fiscal outlook. Consequently, we do not anticipate a wholesale implementation of the proposed tax cuts in a single financial year, much less in 2017 when the IMF measures remain operational and the new administration conducts its sensitivity analysis. The budget deficit outturn for 2016 would also be crucial in determining the available scope for tax cuts in 2017. Given the historical fiscal pressures in election years, a wider-than-expected fiscal deficit in 2016 would limit the scope for significant tax cuts in 2017 as the government would have to minimize fiscal risks in the short term. Ghana’s fiscal deficit as at Sep-2016 was 5.9%, exceeding the 5.0% year-end target agreed with the IMF for 2016, raising the risk of a wider-than-expected fiscal deficit by close of 2016.
Amongst the list of measures to finance the tax cuts is the anticipated fiscal space from a reduction in interest rates paid on the country’s debt stock. As observed in Q4-2016, the interest rates on Ghana’s Treasury debts securities (maturities from 91-day to 2-year Notes) have declined consistently as inflation expectations moderate amidst elevated liquidity on the interbank market. The sustained decline in the yields for T-Bills should help contain the debt service cost for short-term domestic debts in 2017 and would afford the fiscal space to implement some tax incentives in 2017.
Another proposed financing source for the tax cuts is the expected increase in oil and gas revenue from the TEN and SANKOFA oil fields. The Tweneboa Enyenra-Notmme (TEN) oil field which commenced production in Aug-2016 with an average daily output of 14,600 is expected to hit 50,000 barrel per day in 2017. The revenues to be accrued from this new oil field in addition to the existing Jubilee oil and expected SANKOFA oil (by Aug-2017) raises the cash flow prospects for 2017 especially with average Brent price expected above $50pb in 2017. While this positive outlook for crude oil cash flow could support the effort to implement some tax cuts in 2017, we are however cautious of some downside risks to crude oil output.
The optimization of the TEN field (beyond the 11 wells already drilled) would depend on a favourable verdict in the maritime border dispute with La Cote d’Ivoire which is expected to be settled in late-2017. While crude oil production on the SANKOFA filed would commence in 2017, gas extraction would be in 2018. Given that gas is the major deposit in the SANKOFA field, the 2018 commencement date for gas production indicates a potential for gradual implementation of the tax cuts in order to avert significant fiscal risk.
Outlook for Monetary Policy Stance
Given the easing inflationary pressure and the moderating inflation expectations, the path of monetary policy is expected to be more accommodative in 2017 to support a rebound in economic activity. The tight monetary stance maintained in 2016, which was underpinned by the cost-push inflationary pressure, was necessary to minimize the second-round effect of the cost-side pressures. The diminishing cost-push pressures supported by a firmly anchored demand resulted in lowering actual and expected inflation, prompting a 50bps cut in the policy rate to 25.5% in Nov-2016 to signal the prospect of monetary easing in 2017. In light of our expected decline in headline inflation to 10.1% by FY-2017, we anticipated a gradual reduction in Ghana’s monetary policy rate to between 19.5% ± 50bps by end of the year.
This article features in the February 2017 edition of INTO AFRICA Magazine, insights on Africa’s economic prospects for 2017.
Courage Kingsley Martey is a senior Economic Analyst at Databank Limited, Ghana.