Culled–Proshare
March 28, 2018/BMI Research
BMI View: Ghana’s current account deficit will narrow in the short-term, largely due to a strong performance of oil exports. The combination of narrowing current account shortfalls and rising investment inflows will support a recovery of foreign reserves, further improving the country’s external position.
We expect Ghana’s balance of payments dynamics to improve over the short term on the back of oil-led export growth and a favourable business environment. Although we anticipate rising demand for consumer and capital goods imports, a robust expansion in Ghana’s exports, especially its oil exports as several new fields come online, will see the overall goods trade balance shift into a surplus for the first time in over two decades. This will see Ghana’s current account deficit narrow from an average of 9.1% of GDP over the last decade (and an estimated 2.9% of GDP in 2017) to 1.4% in 2018 and 1.6% in 2019. Moreover, increased oil prices and Ghana’s favourable business environment will see foreign direct investment remain robust, while the country’s high real interest rates compared to developed markets will help stimulate short-term capital inflows. Due to this, we anticipate Ghana’s external position to improve substantially over coming years.
Imports Will Remain Robust…
Goods and services imports are set for continued growth, driven higher by consumer and capital good demand. Imports of capital goods for construction projects and the further development of major oil fields will continue. At the same time, monetary easing to stimulate the lagging non-oil economy will contribute to growing consumer import demand. We expect that the Bank of Ghana (BoG) will cut its benchmark interest rate from 20.00% to 18.00% by the end of 2018, following 500 basis points worth of cuts between late 2016 and November 2017.
Meanwhile, the government’s ‘energy bond’ programme of assuming responsibility for large portions of state-owned energy companies’ debts will gradually reduce the banking sector’s non-performing loan burden, further easing credit conditions .
…But Oil Exports Will Narrow The Current Account Deficit
Despite the aforementioned factors driving import growth, we expect exports will be far more robust in the years ahead, boosting the country’s goods trade position. Oil output has already begun to rise after the Tweneboa, Enyenra, Ntomme (TEN) oil field and Sankofa gas project came online in 2016 and 2017, respectively. We forecast production to grow further from 136,400 barrels per day to 197,700 b/d in 2018 and 204,300 b/d in 2019 as recovering prices incentivise greater output. Moreover, our Oil & Gas team’s upward revision of average Brent crude forecasts in 2018 to USD65.0/bbl, up from USD57.0/bbl previously, further adds to our bullish outlook for Ghana’s trade dynamics.
Ghana’s other major commodity exports will see more mixed developments in coming years. Gold made up 41.6% of exports in 2016 as oil prices bottomed out. Although we expect the price of gold to rise from USD1,259.0/oz in 2017 to USD1,325.0/oz in 2019 while output sees moderate growth, we note that a crackdown on illegal gold mining, which has risen sharply as a share of the total in recent years, may interrupt extraction and trade flows. Regarding cocoa, export volumes will remain relatively robust.
However, we have downgraded our price forecasts, and also see the illegal mining of gold presenting a downside risk to output, as unsanctioned excavations often take place in areas around farmland and damage the environment.
Rising FDI Will Bolster Foreign Reserves
While improved trade dynamics look set to narrow the current account deficit, we also anticipate the financial account to benefit from rising foreign investment, boosting Ghana’s foreign reserves. Foreign direct investment declined in early 2017 following the completion of work related to the Sankofa gas project and TEN oil field. However, we see financial inflows picking up over 2018 and 2019 for the further expansion of oil fields, following Ghana winning a prolonged international court case against Côte d’Ivoire over offshore reserves.
The combination of rising investment and structurally narrower current account deficits compared to previous years will see Ghana’s foreign reserves recover markedly in the short term, with its import cover rising from an estimated 2.3 months at the end of 2017 to 5.1 in 2018 and 6.1 in 2019, indicating a much improved external position.
