Ghana Economic Outlook-310111(1) (2)

8/6/2019 Ghana Economic Outlook-310111(1) (2)

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Ghanas 2011 economic outlookBias towards a weak cedi

Yvonne Mhango+27 (11) 750 [email protected]

ResearchEconomics

31 January 2011

Ghana

Dutch Disease fears. The drop in the value of the cedi over the past twomonths is attributed to a shortage of dollars due to the Bank of Ghanas absence inthe foreign exchange market as a seller of dollars since late December 2010. Thehiatus since the last bond auction, in October 2010, has also been longer than usual,which implies that Ghana has not had an injection of portfolio inflows in a fewmonths. These developments, which coincide with the commencement of oilproduction in the country, are in accordance with some officials bias for a weak cedito counter the potential Dutch Disease effects of a commodity exporter. Ghanas

uncompetitive manufacturing sector is especially at risk from a strong cedi. Asmaller current account deficit in 2011, owing to the projected 40-50%increase in export earnings and fall-off in some big-ticket capital equipmentimports, which are required for the commencement of oil production,suggests that the cedi will retrace some of its value in 2011. However, the biastowards a weak cedi is likely to counter any strengthening tendencies. Wethus project a moderate depreciation of the cedi to an average of $/GHS1.45 in2011, from $/GHS1.43 in 2010.

The debut of oil to propel growth into the double-digit region.2011 will be the first full year of oil production in Ghana following its commencementon 15 December 2010. Production is expected to reach 120,000 bpd in 2011.Compared with 2.5mn bpd in Nigeria, Ghanas oil production may be low but itpromises to be an important export (8-10% of GDP) and new source of tax revenue(1% of GDP). Projections put oil production at 17% of non-oil GDP. Moreover, thesector will boost the demand for services. Ahead of the commencement of oilproduction the business services sector, including ICT, financial services andcommerce, and the hospitality sector exhibited strong growth in 2010. This isexpected to continue in 2011, with the striking of first oil expected to propel realGDP growth to 10.5% in 2011, from 6.6% in 2010, before moderating to 7.1% in2012.

Credit growth to strengthen. The recovery of credit growth is expected tocontinue in 2011 on the back of lower interest rates, a decrease in the non-performing loans (NPL) ratio and strengthening economic activity. The averagelending rate decreased to 27.6% in November 2010, from 32.8% a year earlier, thuseasing the cost of capital. Moreover, the government has cleared some of itsarrears, which partly helped lower NPLs to 18.1% in September 2010 from 20% inFebruary 2010. The improvement in credit growth that began in mid-2010 stemmed

from the recovery of international trade and industrial production. In particular, creditextended to exporters and importers grew by 77% YoY and 30% YoY, respectively.The construction sector, which was the worst hit by unpaid government contracts, isexpected to stage a recovery in 2011. This is positive for lenders because pre-crisisalmost 10% of credit went to construction.

The return of double-digit inflation. Inflation has been on an almost two-year decline on the back of good levels of rainfall, tighter fiscal policy, softercommodity prices and a stable cedi. However, it has hit bottom and is set to increasein 2011, after coming down nicely to a two-decade low of 8.6% YoY in December2010. Inflationary pressures will mainly stem from non-food inflation, particularlyenergy prices. In early January 2011, the government announced a 30% increase inthe fuel price, in accordance with the higher international oil price. A stronger oil pricewill translate into higher transport and distribution costs. Moreover, the surge inglobal food prices will feed into local food inflation. Up to 80% of the rice consumed

in Ghana is imported. We expect inflation to fall back into the double-digit realm andend 2011 at 11.5-12.0% YoY. If inflation proves stronger than our projection,monetary policy will be tightened.

Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & ExchangeCommission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.

Snapshot of macroeconomic indicators2010 2011E 2012E

Real economyNominal GDP $bn 31.3 40.2 46.7Real GDP growth YoY, % 6.6 10.5 7.1GDP per capita $ 1,322 1,654 1,874External sectorCurrent account balance % of GDP -9.4 -4.7 -4.3Fiscal sectorBudget balance % of GDP -5.6 -5.1 -7.7

Government debt % of GDP 35.9 34.5 37.1Monetary policyInflation YE, % 8.6 11.6 13.2Policy rate YE, % 13.5 12.5 14.5Exchange rate $/GHS, avg 1.43 1.45 1.43

Source: Renaissance Capital estimates


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31 January 2011 Nigerias 2011 economic outlook Renaissance Capital

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Summary

Bias towards a weak cedi. Dutch Disease fears on becoming an oil

producer explain some government officials bias for a weak cedi to counter

the impact of an increase in dollar inflows on the currency. Ghanas

uncompetitive manufacturing sector is especially at risk from a strong cedi.

The impact of the projected 50% increase in export earnings on the current

account suggests that the cedi will retrace some of its value in 2011.That

having been said, the weak cedi bias is likely to counter any strengthening

tendencies.

Rebound of economy from 2H10. The growth of Ghanas Composite

Index of Economic Activity (CIEA) took a turn in mid-2010 and began to

increase on the back of strengthening internal demand, as indicated by thesharp increase in imports and improvement in consumption tax revenue, as

well as a strong increase in fixed investment ahead of the start of oil

production.

Debut of oil production to spur double-digit economic growth in 2011.

Initial oil production is projected at 17% of non-oil GDP in 2011, implying

that the oil and gas sector will make up 9-12% of GDP in 2011.The

demand for business services is also expected to increase as a result of

the commencement of oil production.

Arrears clearance support credit growth recovery. Credit growth will

continue to improve in 2011 on the back of lower interest rates, a decrease

in NPLs, and strengthening economic activity. The average lending ratedecreased during 2010, in accordance with other interest rates, to 27.6% in

November 2010, vs 32.8% a year earlier, while the NPL ratio decreased

from 20% in February to 18.1% in September. Repatriated income to offset impact of oil exports boon.Oil is

expected to boost export earnings by about 40-50% to about 25% of GDP

in 2011 and significantly narrow the trade deficit to 6% of GDP. However,

as the oil industry is dominated by foreign players who import skills, the

repatriation of income by foreign oil companies and related industries, and

the remitting of income by expatriates is expected to increase sharply in

2011. The IMF projects a more than two-fold increase in the services and

income account deficit to about $2.5bn (6% of GDP) in 2011.

Inflation to move sideways in 2011.Stronger energy prices will putupward pressure on non-food inflation.The oil price is expected to average

$90/bbl in 2011, up from $80/bbl. As fuel is Ghanas biggest import by

value and constitutes 15-20% of total imports, the stronger price is

expected to translate into higher domestic fuel prices and transport costs.

Higher global food prices will also translate into higher food inflation 2011: Year of delivery in the political calendar.The National Democratic

Congress (NDC) administration is expected to start delivering in

anticipation of the end 2012 elections.The government plans to increase

capital expenditure by almost 30% in 2011, to GHS3.74bn ($2.6bn). As the

support bases for the main two political parties are relatively equal, populist

policies, such as wage increases, in the run-up to the elections are likely as

they could swing the elections. We thus expect fiscal policy to loosen and

the ballooning of the deficit to recur in 2012, to 7-8% of GDP, from an

estimated 5.1% in 2011.

Ghana


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Renaissance Capital Ghanas 2011 economic outlook 31 January 2011

Figure 1: Ghana: Key Economic Forecasts

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012EActivityReal GDP (%YoY) 3.7 4.0 4.5 5.2 5.6 5.9 6.4 6.5 8.4 4.7 6.6 10.5 7.1Private consumption (%YoY) 2.0 2.7 3.8 3.6 4.4 6.5 8.5 5.5 13.0 -5.6 3.8 4.4 6.2Government consumption (%YoY) -2.7 -0.6 6.1 22.9 11.5 33.2 -21.4 8.9 5.5 -10.7 3.7 5.0 7.0Investment (%YoY) 17.0 22.1 -27.7 28.5 30.6 8.2 -20.6 -1.1 15.7 -4.5 7.1 6.3 7.0Industry, value added (%YoY) 6.1 15.1 4.5 6.0 49.0 6.0Nominal GDP (GHSbn) 2.7 3.8 4.9 6.6 8.0 9.7 18.7 23.2 30.2 36.9 44.8 58.3 66.8Nominal GDP (EURbn) 5.2 5.8 6.5 6.8 7.1 8.6 16.2 18.2 19.0 18.5 23.6 30.9 34.6Nominal GDP ($bn) 4.8 5.2 6.2 7.7 8.9 10.7 20.3 24.9 27.9 25.8 31.3 40.2 46.7Population (mn) 18.4 18.9 19.4 19.9 20.4 20.9 21.4 22.0 22.5 23.1 23.7 24.3 24.9GDP per capita ($) 263 276 319 387 436 512 949 1 133 1 240 1 116 1 322 1 654 1 874Gross domestic saving (% of GDP) 5.6 7.0 7.4 7.0 7.3 3.7 6.1 3.8 2.0 8.7 10.2 14.8 15.3Stock of bank credit to corporate/householdsector (% of GDP) 8.6 9.5 10.7 11.8 14.0 10.1 13.4 17.1 21.3 19.6 19.1 21.2Loan to deposit ratio 59.6 50.9 57.3 49.8 66.1 62.4 67.5 71.9 62.4 52.1 48.2 45.6

PricesCPI (avg %YoY) 25.2 32.9 14.8 26.7 12.6 15.1 10.2 10.7 16.5 19.3 10.8 9.3 12.2CPI (end-year %YoY) 40.5 21.3 15.2 23.6 11.8 14.8 10.9 12.7 18.1 16.0 8.6 11.6 13.2PPI (end-year %YoY) 32.6 9.6 27.7 13.5 15.3 16.8

Fiscal balance (% of GDP)Consolidated government balance -9.9 -7.2 -6.7 -4.9 -5.0 -4.6 -7.5 -9.2 -14.7 -9.8 -5.6 -5.1 -7.7Total public debt 26.1 31.5 36.1 39.2 35.9 34.6 37.1

External balanceExports ($bn) 1.9 1.9 2.0 2.6 2.7 2.8 3.7 4.2 5.3 5.8 6.3 9.9 11.4Imports ($bn) 2.8 3.0 2.7 3.2 4.3 5.3 6.8 8.1 10.3 8.0 10.3 12.2 14.8Trade balance ($bn) -0.8 -1.1 -0.7 -0.7 -1.6 -2.5 -3.0 -3.9 -5.0 -2.2 -4.1 -2.4 -3.4Trade balance (% of GDP) -17.1 -21.1 -11.2 -8.7 -17.9 -23.8 -14.9 -15.6 -17.9 -8.6 -13.1 -5.9 -7.4Current account balance ($bn) -0.4 -0.3 -0.1 -0.1 -0.4 -0.9 -1.3 -1.8 -3.1 -0.8 -2.9 -1.9 -2.0

Current account balance (% of GDP) -8.0 -5.5 -1.1 -1.6 -4.0 -8.3 -6.2 -7.2 -11.1 -3.1 -9.4 -4.7 -4.3Net FDI ($bn) 0.2 0.1 0.1 0.1 0.1 0.1 0.6 1.0 2.1 1.7 2.0 2.3 2.7Net FDI (% of GDP) 3.4 1.7 1.0 1.8 1.6 1.4 3.1 3.9 7.6 6.5 6.3 5.7 5.8Current account balance plus FDI (% of GDP) -4.6 -3.8 -0.1 0.2 -2.4 -6.9 -3.1 -3.4 -3.6 3.5 -3.1 0.9 1.5Export volume (%YoY) -4 8 27 6 4 33 12 26 11 7 58 16Import volume (%YoY) 7 -9 19 33 24 26 19 27 -22 29 18 21Foreign exchange reserves (ex gold, $bn) 0.2 0.3 0.5 1.4 1.6 1.8 2.1 2.8 2.0 3.2 4.2 4.7 5.7Import cover (months of merchandise imports) 1.0 1.2 2.4 5.0 4.5 3.9 3.7 4.2 2.3 4.8 4.9 4.6 4.6

Debt indicators 6.1 6.3 7.0 7.6 7.1 6.7 3.2 4.5 4.9 5.7 6.8 7.5Gross external debt ($bn) 117 103 90 85 66 33 13 16 19 18 17 16Gross external debt (% of GDP) 328 315 272 280 252 181 76 85 84 91 69 65Gross external debt (% of exports) 0.4 0.3 0.2 0.5 0.2 0.3 0.2 0.2 0.2 0.2 0.2 0.3Total debt service ($bn) 7 5 2 5 2 1 1 1 1 1 1 1Total debt service (% of GDP) 21 14 7 17 9 8 6 3 4 4 2 2Total debt service (% of exports) 6.1 6.3 7.0 7.6 7.1 6.7 3.2 4.5 4.9 5.7 6.8 7.5

Monetary indicators, interest and exchange ratesMonetary policy rate (%) 27.0 27.0 24.5 21.5 18.5 15.5 12.5 13.5 17.0 18.0 13.5 12.5 14.5Broad money supply (%YoY) 50.0 35.8 26.0 14.1 38.8 36.3 40.2 26.9 35.5 36.5 36.0Credit to the private sector (%YoY) 45.3 31.3 30.0 40.8 64.0 43.7 17.6 13.3 27.5 37.03M T-bill interest rate (avg %) 35.9 37.0 24.8 28.0 17.2 15.2 10.1 9.8 17.8 25.2 13.8 12.7 13.23M interest rate spread over $-Libor (ppts) 29.4 33.2 23.0 26.8 15.6 11.6 4.9 4.5 14.9 24.5 13.5 12.2 11.72Y yield (%YE) 17.0 13.5 12.8 21.0 23.5 12.7 13.2 13.5Exchange rate (GHS/$) YE 0.69 0.74 0.84 0.89 0.90 0.91 0.92 0.97 1.27 1.43 1.49 1.43 1.43Exchange rate (GHS/E$) annual avg 0.52 0.73 0.79 0.86 0.9 0.91 0.92 0.93 1.08 1.43 1.43 1.45 1.43Exchange rate (GHS/EUR) YE 0.73 0.65 0.88 1.11 1.22 1.08 1.22 1.41 1.77 2.05 1.97 1.86 1.93Exchange rate (GHS/EUR) annual avg 0.56 0.65 0.75 0.98 1.12 1.13 1.15 1.28 1.59 1.97 1.90 1.89 1.93

Sources: Renaissance Capital, Bloomberg, Bank of Ghana, IMF, Ghana Statistics Service, World Bank

Annual forecasts


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Figure 2: GDP by economic activity (2010E) Figure 3: GDP by type of expenditure, % of GDP

Source: Ghana Statistical Service Source: Renaissance Capital estimates

Figure 4: Composition of exports, 2009 Figure 5: Composition of imports, 2009

Source: IMF Source: Renaissance Capital estimates

Figure 6: Export markets, 2009 Figure 7: Origin of imports, 2009

Source: IMF Sources: IMF

Crops20%

Livestock2%

Forestry &logging

3%

Fishing2%

Mining &quarrying

3%

Manufacturing8%

Electricity1%

Water &sewerage

1%

Construction9%

Commerce

6%

Hotels &restaurants

5%

Transport &storage

13%ICT4%

Financialservices

3%

Real estateservices

2%

Businessservices2%

Public admin.& defence;

social security6%

Education4%

Health &social work1%

Othercommunity,

social &personal

4%

-30-20

-100

102030405060708090

100110120130

1999 2004 2009

Private consumption Government consumption

Investment Net exports

Cocoa32%

Gold44%

Other24%

Fuel19%

Machinery12%

Electrical &electronicequipment

10%

Vehicles7%

Metal products7%Plastics

3%Chemicals

3%Cereals

3%

Pharmaceuticals3%

Textiles2%

Sugar

2%

Other29%

Netherlands13%

UK8%France

6%Ukraine

6%US4%

Germany

4%

India

4%

Belgium

3%

Japan3%

Turkey3%

Benin3%

Malaysia3%

Russia2%

Spain2%

China2%

Switzerland2%

Nigeria

2%Italy2%

Angola

2%

Cuba

1%

Togo

1% UAE1%

Other25%

China17%

Nigeria12%

US7%

Cte d'Ivoire

6%

France5%

UK4%

India4%

South Africa4%

Germany3%

Netherlands3%

Belgium3%

Europe3%

Brazil2%

Thailand2%

Italy2%

Sweden2%

Korea2%

Canada1%Spain

1%

Malaysia

1%Japan

1%

Australia

1%Indonesia

1%

Other12%

Economic structure


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Bias towards a weak cedi

The depreciation of the cedi can largely be attributed to two reasons. First,

a shortage of dollars due to the absence of the Bank of Ghana in the

foreign exchange market (as a seller of dollars) since late December 2010.

Second, the hiatus since the last bond auction in October 2010 has been

longer than usual, which implies that there has not been an injection in the

market of dollars from portfolio investors since the last auction. This implies

that foreign exchange reserves have moderated since the last point

available for October 2010 of 3.2 months of import cover ($3.973bn) (see

Figure 8).

There is an expectation in the local market that earnings from oil exports

will ease the shortage of dollars in the market. However indications are thatGhanas biggest earners of dollars are cedi flush, which suggests that they

will not be coming into the market to buy cedis in the near term, so the

supply of forex will remain tight.

Figure 8: Exchange rate and foreign exchange reserves

Source: Bloomberg

Some officials in Africas newest oil producing economy, who are

concerned about Ghana falling prey to the Dutch Disease effect, would

prefer a weak cedi. They are of the view that the boost that oil will give to

forex earnings will strengthen the local currency and thus undermine the

competitiveness of the domestic manufacturing sector. Given the

uncompetitiveness of Ghanas manufacturing sector, which produces 8% of

GDP, these officials have good reason to be concerned. These officials

would also prefer a lower interest environment, to reduce the appeal of

Ghanaian Treasury securities to portfolio investors as high-yielding paper.

We expect the cedi to retrace its value during the course of 2011 on

account of the projected 40-50% increase in export earnings which will, at

some point during the year, be sold into the market.However, the bias

towards a weak cedi is likely to counter any strengthening tendencies. We

thus project a depreciation of the cedi to an average of $/GHS1.45 in 2011,

from $/GHS1.43 in 2010.

0

0.5

1

1.5

2

2.5

3

3.50.40

0.60

0.80

1.00

1.20

1.40

1.60

2007 2008 2009 2010 2011

GHS/USD months of Import cover (rhs)

2011 economic outlook


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Economy rebounds from 2H10

The rate of Ghanas CIEA took a turn in mid-2010 and began to

increase indicating that the slowdown that began in mid-2009 had

ended. The CIEA increased by 9.9% YoY, in real terms, in 1Q10-3Q10,

compared with 3.8% YoY in the corresponding period of 2009. The

indicators that signalled a recovery was underway were international trade

(exports and imports), industrial consumption of electricity, tourist arrivals,

domestic value added tax (VAT) collections, private sector security

contributions, cement sales and port harbour activity. The economic

indicators that subdued the recovery were key manufacturers sales and

weak growth of lending to the private sector.

Figure 9: Ghanas Composite Index of Economic Activity, %YoY

Source: Bank of Ghana

Strong import growth and a surge in revenue from consumption taxes

indicate strengthening domestic demand. Merchandise imports are

estimated to have increased by 30% YoY to $10.5bn (34% of GDP) in

2010, after contracting by 22% YoY in 2009 (see Figure 11), while export

earnings improved by 16% to $6.8bn (22% of GDP). Moreover, the

revenue from taxes on consumption and sales, VAT and excise duty,

surged by 51% to GHS835mn in January-November 2010, compared with

the corresponding period of 2009 (see Figure 10).

Figure 10: Domestic VAT and Excise Duty, GHSmn Figure 11: Merchandise imports, %YoY

Source: Bank of Ghana Source: Bank of Ghana

0

100

200

300

400

500

600

700

800

900

Jan-Nov09 Jan-Nov10

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010


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The increase in internal demand was augmented by an increase in tourist

arrivals, which translated into an estimated 11.3% YoY expansion of thehotels and restaurants sector (which constituted an estimated 5% of GDP)

in 2010, compared with 6.1% YoY in 2009.Business travellers likely made

up a significant share of the increase in arrivals, which speaks to the

opportunities that foreign investors see in Ghana.

In addition to consumption, fixed investment also increased in 2010 ahead

of the commencement of oil production and as the worst of the global

financial crisis passed. It is estimated that foreign direct investment

(FDI) increased by 25% YoY to $2.1bn in 2010, two-thirds of which

flowed into the oil sector.

Figure 12: Foreign direct investment, $bn

Source: Bank of Ghana

We expect the recovery in consumption expenditure to be sustained by

higher real incomes, due to structurally lower inflation. Strong commodity

prices, particularly the prices of gold and cocoa (see section with heading

Cocoa production is projected to increase in 2011 on the back of higher

prices), are expected to sustain the strong recovery in international trade

that began in 2010. However, it is the commencement of oil production in

2011 that is projected to boost industrial activity and elevate Ghanas

economic growth to north of 10% in 2011. The downside risk to the 2011

outlook is a spurt of inflation that erodes real income growth and a weak

cedi that dampens the pick-up in consumption expenditure.

Debut of oil production to spur double-digit growth in 2011

The commencement of oil production on 15 December 2010 implies

that Ghana is officially a commercial oil producer. Oil production is

projected to reach 120,000 bpd by mid-2011, however new discoveries

suggest that this may be a conservative estimate. Having said that

production cannot exceed 200,000 bpd as that is the capacity of the

existing floating production storage. Proven reserves of 1.5bn bbls,compared with 37bn bbls in Nigeria, imply that Ghanas number of years of

0

0.4

0.8

1.2

1.6

2

2.4

2008 2009 2010E


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reserves is significantly lower than that of Africas oil majors and Ghanas

oil production will peak in the next five years and thereafter decline. Initial oil production is projected at 17% of non-oil GDP in 2011. We

thus estimate that the oil and gas sector will constitute about 10-12% of

GDP in 2011, and boost the industrial sectors contribution to national

output to 25% of GDP, from 20% in 2010. However, the oil sectors

contribution to GDP is expected to moderate beyond 2016, as oil

production begins to taper off.. Figure 13: Post-oil change in composition of GDP in 2011 (% of GDP) Figure 14: Projected composition of economic sectors in 2011 (% of GDP)

Source: Renaissance Capital estimates Source: Renaissance Capital estimates We expect a pick-up in activity in the business services sector as a

result of the commencement of oil production. Ahead of the start of oil

production on 15 December 2010, the business services sectors, including

ICT, financial services, commerce, and the hospitality sector (hotels and

restaurants) exhibited strong growth (see Figure 15). As such, the services

sector, which made up 50% of GDP in 2010, was the fastest growing

sectorat 8.2% YoY, compared with 4.8% YoY and 6.0% YoY in the

agricultural and industrial sectors, respectively. We expect this level of

activity in the services sector to be sustained in 2011. Figure 15: Contribution of principle sectors to real GDP growth (percentage points)

*Figures in brackets are the sector shares of nominal GDPSource: Nigerias National Bureau of Statistics

30 26

19 28

5146

0%

20%

40%

60%

80%

100%

Pre-oil: 2010 Post-oil: 2011

Agriculture Industry Services

Crops

19%

Livestock2%

Forestry &logging

3%Fishing

2%Mining &quarrying

1%

Oil and gas12%

Manufacturing5%

Utilities1%

Construction9%

Commerce5%

Hotels &restaurants

7%

Transport& storage

8%

ICT

2%

Financialservices

5% Other services

19%

-0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2

Crops (19%)

Information & communication (3.5%)Construction (8.5%)

Transport & storage (12%)

Commerce (6%)

Hotels & restaurants (5%)

Financial services (3.2%)

Public admin. & defence; social security (5.4%)

Mining & quarrying (2.7%)

Education (4.1%)

Business services(2.4%)

Other services (3.7%)

Manufacturing (7.8%)

Electricity (0.7%)

Forestry & logging (3%)

Health & social work (1.4%)

Livestock (2.2%)

Fishing (2%)

2009 2010


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ICT to remain one of Ghanas fastest growing sectors in 2011. The ICT

sector has been growing at an average of 18% YoY over the past threeyears. Ghana has an estimated 15.7mn subscribers, which constitutes two-

thirds of the market. The sectors expansion was accelerated by the entry

of new players including MTN, through an acquisition in 2006, which

presently has a market share of 56%. In a period of four years MTN,

together with other new entrants including Vodafone, pushed the SIM

penetration up to the 66% it stands at today. There thus remains significant

room for penetration levels to increase, which implies that strong growth

rates can be sustained over the next couple of years. Moreover, demand

for data services and other value-added telecommunication services for the

business community are also expected to increase.

Arrears clearance supports credit growth recovery

The financial services sector grew by an estimated 13.3% in 2010, up from

9.3% in 2009, despite starting the year with a high NPL ratio due to

government arrears to contractors and the failure of a few public

enterprises to meet their debt obligations. As the government is the largest

economic entity in Ghana, as it is in several SSA economies, if they cannot

service their debt, the enterprises they owe cannot operate unfettered.

However, during 2010 some of the arrears were addressed and part of the

public enterprises debt was restructured. As such, the NPL ratio decreased

from 20% in February to 18.1% in September, and private sector credit

growth improved to 12.2% YoY in October 2010, from a low of 3.0% YoY inMay 2010 (see Figure 16).

Figure 16: Credit extended to the private sector (YoY%) Figure 17: Distribution of credit to private sector (% of total)

Source: Bank of Ghana Source: Bank of Ghana

The recovery of international trade and industrial production spurred

the rebound in lending. Exporters and importers exhibited the greatestincrease in credit growth in the year to October 2010. Credit extended to

exporters surged by 77% YoY, while credit extended to importers

0

10

20

30

40

50

60

70

2007 2008 2009 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Oct-09 Oct-10

Miscellaneous

Services

Electricity, gas & water

Commerce & finance

Construction

Import trade

Mining & quarrying

Transportation, storage &communicationManufacturing

Export trade

Agriculture, forestry & fishing


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increased by 30% YoY. This corresponds with the strong increase in the

values of imports and exports in 2010 (see section with heading Reboundof economy from 2H10). Credit to the utilities sector increased by 33% YoY

over the same period, largely due to electricity. The electricity sector grew

by an estimated 17% in 2010, partly due to the increase in tariffs in mid-

2010 and savings in power generation costs due to gas deliveries through

the pipeline from Nigeria.

Credit growth will continue to improve in 2011 on the back of lower

interest rates, a decrease in NPLs, and strengthening economic

activity. The average lending rate decreased during 2010, in accordance

with other interest rates, to 27.6% in November 2010, compared with

32.8% a year earlier. The construction sector, which was undermined by

government arrears, is expected to increase its lending in 2011, on the

back of what the government terms an accelerated clearance of domestic

arrears in 2010. An estimated GHS261mn ($184mn) was spent on the

clearance of arrears and commitments in 2010.

Repatriated income to offset oil exports boon

Oil is expected to boost export earnings by 40-50% in 2011. We expect

this increase in export earnings to narrow the trade deficit to 6% of GDP,

down from an estimated 13% in 2010. A smaller merchandise trade deficit

implies a decline in the current account deficit in 2011 to a projected 4.7%

of GDP, from an estimated 9.4% of GDP in 2010. However, this assumesall other things remain equal, which is not the case. As Ghanas oil industry

is dominated by foreign players who import skills, an oil producing Ghana

implies that the repatriation of income by foreign oil companies and

related industries, and remitting of income by expatriates will

increase sharply in 2011.

The IMF projects a more than two-fold increase in the current accounts

services and income account deficit to over $2bn in 2011. Moreover,

operators in the oil sector will also import services, including consultancy

services, from foreign service providers. This implies an increase in

services payments to commercial entities based outside of Ghana.

Figure 18: Current account balances, $mn Figure 19: Post-oil exports composition, 2011

Source: IMF Source: IMF

-3,747-2,546

-976-2,456

2,558 3,101

-5,400

-4,500

-3,600

-2,700

-1,800

-900

0

900

1,800

2,700

3,600

2010 2011E

Merchandise trade balance Balance on services & incomeCocoa21%

Gold32%

Petroleum32%

Other15%


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11


Oils boon to the current account will be undermined by an increase

in repatriated income. A wider services and income account deficit isexpected to offset the impact of a narrower merchandise trade deficit on

the current account deficit. This implies that fears of a strong cedi in 2011

may be overdone, which is favourable for the international competitiveness

of Ghanas small manufacturing sector.

Higher prices to promote increase in cocoa production

Cocoa production is projected to increase in 2011 on the back of

higher prices (see Figure 20). Crop production, of which cocoa makes up

12%, was the largest contributor to real GDP growth in 2010 (see Figure15), however its growth momentum halved during the year owing to the

high base effect of a bumper harvest in 2009 and floods that negatively

impacted production in the northern parts of the country.

. Figure 20: Cocoa price, $/tonne Figure 21: Composition of worlds cocoa producers

Source: IMF, Bloomberg Source: Bloomberg

Ghana produces almost 20% of the worlds cocoa output, which makes it

the worlds second largest producer of cocoa (see Figure 21). Cumulative

purchases in the first seven weeks of the 2010/2011 cocoa season, which

commenced on 7 October 2010, amounted to 376,393 tonnes, which is a16.4% YoY increase from the corresponding period of 2009/2010.

Cumulative purchases for the entire 2010/11 season are projected be

13.8% YoY higher at 660,000 tonnes than they were a year earlier.

Heightened political risk in Cote dIvoire, the worlds biggest producer of

cocoa (with two-thirds of global production) and the export ban imposed by

Alassane Ouattara, the widely recognised winner of Cote dIvoires

November 2010 election, is expected to keep prices elevated in 2011. We

thus expect the allure of higher prices to encourage Ghanaian cocoa

producers to increase their production in 2011/2012. An increase in cocoa

export volumes is favourable for the current account deficit.

1,500

1,800

2,100

2,400

2,700

3,000

3,300

3,600

2007 2008 2009 2010 2011

Cote d'Ivoire34%

Ghana18%Indonesia15%Brazil5%

Ecuador4%

Other24%


12/16


12

Inflation to inch upwards in 2011 Non-food price pressures to increase in 2011.Headline inflation has

been on a downward trend since 1H09 owing to the tightening of fiscal

policy, a slowdown in demand for imports and softer commodity prices.

However, from 2Q10 there has been a slowdown in the rate at which

inflation is decreasing.

Stronger energy prices to put upward pressure on non-food inflation.Non-food inflation has slowed to 11-12% but remains shy of the single-digit

region. The international oil price is expected to average $90/bbl in 2011,

up from $80/bbl. As fuel is Ghanas biggest import by value and constitutes

15-20% of total imports, the stronger price is expected to translate into

higher domestic fuel prices and transport costs. We are thus likely to seenon-food inflation edge up in 2011.

Figure 22: Inflation, consumer prices (%YoY)

Source: Ghana Statistical Service

The increase in global food prices will translate into higher food

inflation. Rice is one of Ghanas staple foods and up to 80% of the

500,000 tonnes that is consumed annually, locally, is imported. When the

rice price tripled during the food crisis of early 2008, the value of imports

surged and the higher cost of imported food helped push food inflation intothe high teens.

Energy and food price pressures in the pipeline suggest that inflation will

finish December 2011 close to 11% YoY, up from 8.6% YoY in December

2010. A weaker-than-projected cedi would worsen the inflation outlook.

2011: Year of delivery on the political calendar

2009 was a year of consolidation for the newly elected NDC party. The first

port of call for President John Atta Mills was to address the large twindeficits (fiscal and current account deficits of 19% and 15% of GDP,

respectively) that threatened the countrys macroeconomic stability. In

0

5

10

15

20

25

2008 2009 2010

Overall Food Non-food


13/16

13


2010, the NDC administration relaxed its spending a little in anticipation of

the commencement of oil production and the upward revision of GDP,which suggests that the twin deficits were not as alarming as they

appeared under the old GDP series.

In 2011, the NDC administration is expected to start delivering in

anticipation of the end 2012 elections. A 14% increase in fiscal spending is

projected for 2011, however capital spending, which has previously been

crowded out by recurrent expenditure overruns, is expected to increase the

most and become the largest expenditure item in the budget ahead of

wages and salaries. The government plans to increase capital

expenditure by almost 30% in 2011, to GHS3.74bn ($2.6bn), the bulk of

which will be spent on social infrastructure. Given that the government is

revenue-squeezed, its borrowing requirement is projected to increase over

the next couple of years in order to finance the infrastructure projects that

are in the pipeline. The government plans to spend about $650mn on

physical infrastructure in 2011, of which 60% will be spent on water supply,

drainage and sanitation, and 36% on roads and highways.

Recurrent ballooning of fiscal deficit. Political tensions are projected to

increase in the run-up to the end2012 elections, however at the scale seen

recently in the rest of the West African region including in Cote dIvoire,

Guinea and Nigeria. The fact that neither the ruling NDC or the opposition

New Patriotic Party are dominant on the political scene implies that the

margins are small at elections, which further implies populist policies, such

as wage increases, in the run-up to the 2012 elections are likely as they

could swing the vote. We thus expect fiscal policy to loosen in 2012 andthe deficit to widen to 7-8% of GDP, from an estimated 5.1% in 2011.


14/16


14

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This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the front page of this document, to provide background information about theissuer or issuers (collectively, the Issuer) and the securities and markets that are the subject matter of this report. Each research analyst hereby certifies that with respect tothe Issuer and such securities and markets, this document has been produced independently of the Issuer and all the views expressed in this document accurately reflect his orher personal views about the Issuer and any and all of such securities and markets. Each research analyst and/or persons connected with any research analyst may haveinteracted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting market information. If the date of this report is not current, theviews and contents may not reflect the research analysts current thinking.

Each research analyst also certifies that no part of his or her compensation was, or will be, directly or indirectly related to the specific ratings, forecasts, estimates, opinions orviews in this research report. Research analysts compensation is determined based upon activities and services intended to benefit the investor clients of RenaissanceSecurities (Cyprus) Limited and any of its affiliates (Renaissance Capital). Like all of Renaissance Capitals employees, research analysts receive compensation that isimpacted by overall Renaissance Capital profitability, which includes revenues from other business units within Renaissance Capital.

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At the time of publication, Renaissance Capital was not aware of any actual, material conflict of interest with any issuers and this report.

Disclosures appendix


15/16

Renaissance Capital research team

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