An Analysis by Michael N.A. COBBLAH
(Country Representative, Ecobank Development Corporation)
It has been two-years of continued macro-economic improvement, notwithstanding the usual dissatisfaction that the average Ghanaian cannot relate to these improvements. Even though the country still faces many basic infrastructure and business bottlenecks, exchange rate stability, sticky interest rate drops and a commendable downtrend in inflation are encouraging signs of an improved economy, especially when compared with the levels in 2008 and in the first half of 2009.
The austere fiscal framework of government has translated into modest inflationary rates and against this backdrop interest rates maintained a commendable downward trajectory. A stable cedi, courtesy of IMF/World Bank foreign exchange injection, has made business planning practical. Moderate export gains and the effect of foreign direct investments, which assumedly were geared towards the upstream oil sector, also supported the local currency. The Ghana Stock Exchange has also recorded a fairly improved earnings position from listed companies, triggering price recovery across the market. General economic growth has regained an upward trajectory, projected at 5.9% for 2010 compared to 4.7% in 2009.
On the back of these economic gains, however modest, the fiscal authorities have developed an aggressive spending strategy for 2011. Together with the oil sector, the country is projected to record a GDP growth of 12.3% - but an estimate of 7% is deemed feasible without the black gold. Headline inflation is targeted at 8.5% for 2011, an ambitious projection compared to the outturn of 18.5% and 15.97% in 2008 and 2009 respectively.
Laudable Initiatives
Laudable initiatives as usual have been planned within the budget framework, recalling that at least one mechanized agriculture service station per district will be established – an objective similar to several documented in previous budgets. In the energy sector, for instance, the continued implementation of electrification projects is assured although erratic supply of power has become the norm. it is heart-warning, though, that government wants to develop a gas master-plan, as potential pipeline – deals for investment bankers are obvious.
A lot more initiatives are set for 2011, and one may refer to EDC’s budget review document for an update. Irrespective of these ideas, however, and the assumption that many Ghanaians may not even “feel these policies in their pockets,” EDC has broad economic expectations for 2011; mostly premised on the analysis from its research centre.
In the EDC’s opinion, the GDP growth of 12.3% (including oil) is achievable and could be improved, particularly through aggressive infrastructural development. It would be great for government to leverage on the huge investor appetite for Ghana and partner the private sector (Public Private Partnerships, PPP) to finance projects such as Gas Master-Plan, roads, housing and sanitation projects. As an investment bank, we have witnessed the keen interest of private equity firms in project finance, even in the construction or refurbishment of hospital and schools.
This is coming on the back of an enhanced economic profile of the country following the recent economic stability and crude oil prospects. The ripple-effects of real-estate expansion in 2010 and its continuation into 2011 will have a considerable knock-on effect to GDP. We expect the top-tier banks to nurture their interest in the power and infrastructural sectors, more so when some of these banks purposely sourced capital in this regard. The multiplier effect of any such capital deployment should boost economic activities. We also note that government’s investment and focus on agriculture could provide an impetus for growth, considering that agriculture still accounts for a substantial portion of GDP.
Downside threats to headline inflation during 2011 are largely contained, in our view – provided government maintains the fiscal balance it has deployed in the past year. We agree, though, that the single spine salary scheme implementation, the aggressive government spending plans in 2011, the transmission effect of festive celebrations and the increase in the tax burden will exert cost-push or demand-pull pressure on consumer prices. These pressures may initially cause headline inflation to inch towards double-digits in the opening months of 2011, especially as we anticipate price increments from the service sector owing to the higher tax burden.
From a CPI base perspective, we do not expect the kind of effect that will push headline inflation beyond 15% in 2011, unless crude oil prices rally strongly and domestic food production harvest fails woefully. Barring exogenous factors like imported inflation and crude oil can be restrained under 15% during the first half of 2011. Moreover, we expect the Bank of Ghana to strengthen its stability policy motives through interest rates and also move to control liquidity should that become overly abundant.
Outlook for Inflation and Interest Rates
Taking into consideration EDC’s projected out-turn for inflation, interest rates are expected to remain relatively modest but inclined to the north during the first half of 2011. Slight increments are anticipated on the shorter end of the curve if inflation is induced by excess liquidity post the festive activities and government’s invisible hands. Government may also use the slight interest rate increases to raise money (via T-bills0 to fund its expansionary activities prior to the receipt of tax and accrued oil revenues, more so if donor or bilateral disbursements are delayed. Generally, we do not expect steep cuts in the central bank policy rate during the first half of 2011, unless – though unlikely – inflationary pressures weaken considerably; in which case the MPC will undoubtedly follow its inflation-targeting framework and apply the cuts. We lean towards a steady policy rate in the first quarter of 2011, as we expect increased liquidity in the economy.
The Ghana cedi will likely remain under GHS1.45 per the US dollar on account of a better foreign exchange reserve of the country. Inflows from bilateral agreements such as the US$10 billion STX financing of housing units and likely inflows from the IMF/World Bank should also provide cushioning. Targeted crude oil proceeds, pegged under US$50 million, are short of the expectations of the dangerously hopeful, but we project this to be a considerable source of influence for the cedi in 2011. From EDC’s position as an investment bank, we are privy to the inflows, otherwise targeted, of investment funds (portfolio and direct investment) taking position for the benefit of an enhanced economy. This should reduce the pressure on the demand for foreign currency, further to the drastic drop in speculative demand for foreign exchange as a store of value. We can also not over-emphasis the importance of continued increases in foreign direct remittances, which have contributed significantly to the availability of foreign exchange to our banks for their international trade business.
Taking a shift to focus on infrastructure, it expects the collateralization stance to improve water supply and sanitation, upgrade some hospitals, and expand as well as establish more public schools in the country. The private talks of developing big shopping malls and residential apartments in parts of Accra can also be given a government boost if we continue to position ourselves as an investor-friendly destination. The Bui Dam project is also among key projects we expect to remain on the special list of governance; nevertheless, it is more of an objective beyond 2011.
The Oil Sub-Sector
For the oil sub-sector, we are quick to join the calls for managing the oil revenue expectations. We hasten to caution that the oil industry is only emerging, especially when expected daily volumes from the Jubilee Field is compared to daily output in Nigeria (i.e. 120,000 barrels a day at peak production for Jubilee compared to 2 million barrels a day in neighbouring Nigeria). The EDC advises that there is need to make conscious efforts as a country to diffuse the overly-blown expectations using our traditional authorities, and this must be done with competitive urgency. We should however encourage our citizenry to take advantage of the local content bill and expose them to other ancillary businesses that the industry presents. Overall, we expect a more transparent industry considering the non-partisan nature with which most of the discussions have been held. If we consider the recent parliamentary debates and interest in the oil revenue management bill, as well as the efforts to ensure good local participation, a logical expectation in 2011 will be one for prudent use of the receipts, not discounting that of a good level of accountability.
I conclude with EDC’s expectations for the Ghana Stock Exchange and iFund – our mutual fund. Forward valuation metrics on the market suggest a cautious approach, though we are optimistic about a long position on some financial and FMCG countries. A positive return for the All-share index during the first quarter of 2011 is justified on our forward multiples, but we see a considerable downside on many counters – especially if their Q3 2010 earnings poor showing extends into the full year of 2010. As far as EDC is concerned, our portfolios are built around strong company fundamentals and we are committed to this in-house style management. iFund, our opened balanced fund, will consider new markets using our extensive African coverage in 2011 ceteris paribus, but the fund will ensure that domestic opportunities are not sidelined.
(Country Representative, Ecobank Development Corporation)
It has been two-years of continued macro-economic improvement, notwithstanding the usual dissatisfaction that the average Ghanaian cannot relate to these improvements. Even though the country still faces many basic infrastructure and business bottlenecks, exchange rate stability, sticky interest rate drops and a commendable downtrend in inflation are encouraging signs of an improved economy, especially when compared with the levels in 2008 and in the first half of 2009.
The austere fiscal framework of government has translated into modest inflationary rates and against this backdrop interest rates maintained a commendable downward trajectory. A stable cedi, courtesy of IMF/World Bank foreign exchange injection, has made business planning practical. Moderate export gains and the effect of foreign direct investments, which assumedly were geared towards the upstream oil sector, also supported the local currency. The Ghana Stock Exchange has also recorded a fairly improved earnings position from listed companies, triggering price recovery across the market. General economic growth has regained an upward trajectory, projected at 5.9% for 2010 compared to 4.7% in 2009.
On the back of these economic gains, however modest, the fiscal authorities have developed an aggressive spending strategy for 2011. Together with the oil sector, the country is projected to record a GDP growth of 12.3% - but an estimate of 7% is deemed feasible without the black gold. Headline inflation is targeted at 8.5% for 2011, an ambitious projection compared to the outturn of 18.5% and 15.97% in 2008 and 2009 respectively.
Laudable Initiatives
Laudable initiatives as usual have been planned within the budget framework, recalling that at least one mechanized agriculture service station per district will be established – an objective similar to several documented in previous budgets. In the energy sector, for instance, the continued implementation of electrification projects is assured although erratic supply of power has become the norm. it is heart-warning, though, that government wants to develop a gas master-plan, as potential pipeline – deals for investment bankers are obvious.
A lot more initiatives are set for 2011, and one may refer to EDC’s budget review document for an update. Irrespective of these ideas, however, and the assumption that many Ghanaians may not even “feel these policies in their pockets,” EDC has broad economic expectations for 2011; mostly premised on the analysis from its research centre.
In the EDC’s opinion, the GDP growth of 12.3% (including oil) is achievable and could be improved, particularly through aggressive infrastructural development. It would be great for government to leverage on the huge investor appetite for Ghana and partner the private sector (Public Private Partnerships, PPP) to finance projects such as Gas Master-Plan, roads, housing and sanitation projects. As an investment bank, we have witnessed the keen interest of private equity firms in project finance, even in the construction or refurbishment of hospital and schools.
This is coming on the back of an enhanced economic profile of the country following the recent economic stability and crude oil prospects. The ripple-effects of real-estate expansion in 2010 and its continuation into 2011 will have a considerable knock-on effect to GDP. We expect the top-tier banks to nurture their interest in the power and infrastructural sectors, more so when some of these banks purposely sourced capital in this regard. The multiplier effect of any such capital deployment should boost economic activities. We also note that government’s investment and focus on agriculture could provide an impetus for growth, considering that agriculture still accounts for a substantial portion of GDP.
Downside threats to headline inflation during 2011 are largely contained, in our view – provided government maintains the fiscal balance it has deployed in the past year. We agree, though, that the single spine salary scheme implementation, the aggressive government spending plans in 2011, the transmission effect of festive celebrations and the increase in the tax burden will exert cost-push or demand-pull pressure on consumer prices. These pressures may initially cause headline inflation to inch towards double-digits in the opening months of 2011, especially as we anticipate price increments from the service sector owing to the higher tax burden.
From a CPI base perspective, we do not expect the kind of effect that will push headline inflation beyond 15% in 2011, unless crude oil prices rally strongly and domestic food production harvest fails woefully. Barring exogenous factors like imported inflation and crude oil can be restrained under 15% during the first half of 2011. Moreover, we expect the Bank of Ghana to strengthen its stability policy motives through interest rates and also move to control liquidity should that become overly abundant.
Outlook for Inflation and Interest Rates
Taking into consideration EDC’s projected out-turn for inflation, interest rates are expected to remain relatively modest but inclined to the north during the first half of 2011. Slight increments are anticipated on the shorter end of the curve if inflation is induced by excess liquidity post the festive activities and government’s invisible hands. Government may also use the slight interest rate increases to raise money (via T-bills0 to fund its expansionary activities prior to the receipt of tax and accrued oil revenues, more so if donor or bilateral disbursements are delayed. Generally, we do not expect steep cuts in the central bank policy rate during the first half of 2011, unless – though unlikely – inflationary pressures weaken considerably; in which case the MPC will undoubtedly follow its inflation-targeting framework and apply the cuts. We lean towards a steady policy rate in the first quarter of 2011, as we expect increased liquidity in the economy.
The Ghana cedi will likely remain under GHS1.45 per the US dollar on account of a better foreign exchange reserve of the country. Inflows from bilateral agreements such as the US$10 billion STX financing of housing units and likely inflows from the IMF/World Bank should also provide cushioning. Targeted crude oil proceeds, pegged under US$50 million, are short of the expectations of the dangerously hopeful, but we project this to be a considerable source of influence for the cedi in 2011. From EDC’s position as an investment bank, we are privy to the inflows, otherwise targeted, of investment funds (portfolio and direct investment) taking position for the benefit of an enhanced economy. This should reduce the pressure on the demand for foreign currency, further to the drastic drop in speculative demand for foreign exchange as a store of value. We can also not over-emphasis the importance of continued increases in foreign direct remittances, which have contributed significantly to the availability of foreign exchange to our banks for their international trade business.
Taking a shift to focus on infrastructure, it expects the collateralization stance to improve water supply and sanitation, upgrade some hospitals, and expand as well as establish more public schools in the country. The private talks of developing big shopping malls and residential apartments in parts of Accra can also be given a government boost if we continue to position ourselves as an investor-friendly destination. The Bui Dam project is also among key projects we expect to remain on the special list of governance; nevertheless, it is more of an objective beyond 2011.
The Oil Sub-Sector
For the oil sub-sector, we are quick to join the calls for managing the oil revenue expectations. We hasten to caution that the oil industry is only emerging, especially when expected daily volumes from the Jubilee Field is compared to daily output in Nigeria (i.e. 120,000 barrels a day at peak production for Jubilee compared to 2 million barrels a day in neighbouring Nigeria). The EDC advises that there is need to make conscious efforts as a country to diffuse the overly-blown expectations using our traditional authorities, and this must be done with competitive urgency. We should however encourage our citizenry to take advantage of the local content bill and expose them to other ancillary businesses that the industry presents. Overall, we expect a more transparent industry considering the non-partisan nature with which most of the discussions have been held. If we consider the recent parliamentary debates and interest in the oil revenue management bill, as well as the efforts to ensure good local participation, a logical expectation in 2011 will be one for prudent use of the receipts, not discounting that of a good level of accountability.
I conclude with EDC’s expectations for the Ghana Stock Exchange and iFund – our mutual fund. Forward valuation metrics on the market suggest a cautious approach, though we are optimistic about a long position on some financial and FMCG countries. A positive return for the All-share index during the first quarter of 2011 is justified on our forward multiples, but we see a considerable downside on many counters – especially if their Q3 2010 earnings poor showing extends into the full year of 2010. As far as EDC is concerned, our portfolios are built around strong company fundamentals and we are committed to this in-house style management. iFund, our opened balanced fund, will consider new markets using our extensive African coverage in 2011 ceteris paribus, but the fund will ensure that domestic opportunities are not sidelined.
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