March 19, 2021/Cordros Report

We initiate coverage of the Ghanaian economy and discuss our views on growth, inflation, currency, monetary policy and fiscal policy.

COVID-19 Puts a Break on Growth Momentum

In line with other countries globally, the COVID-19 pandemic dealt significant blow to the Ghanaian economy, given the containment measures to limit the virus’ spread. Hence, contact-dependent sectors were severely affected, and the supply chain disruptions led to a spike in inflation during the lockdown. The preference for safe-haven assets also limited investors’ exposure to the country’s financial assets. Simultaneously, the (1) IMF’s external support and (2) Eurobond facility helped reduce the local currency’s volatility during the period. Meanwhile, the Monetary Policy Committee of the Bank of Ghana (BOG) reduced the key policy rate by 150bps, in line with global central banks’ measures to limit the pandemic’s impact. The Government also synchronized with the fiscal expansion programme.

Re-opening and Vaccine Administration to Recalibrate Economy

By 2021, we expect the Ghanaian economy to bounce back strongly on the back of a low base in the prior year amidst the increase in economic activities supported by vaccine rollout. We forecast a GDP growth rate of 4.56% y/y in 2021FY (2020E: 1.00% y/y). Similarly, we expect the effect of the high base from 2021 to keep inflation in check even though we are likely to see a moderate rise in inflation in the latter part of the year due to increased economic activity. We forecast an average inflation rate of 8.70% y/y in 2021FY (2020: 9.92% y/y). We believe the improvement in economic activities will lead to a pickup in aggregate demand. We expect the increase in demand to moderately widen the Current Account (CA) deficit amidst a moderate rise in exports. Accordingly, we expect the CA deficit to widen to USD2.57 billion (2020E: USD1.97 billion) or 3.52% of GDP (2020E: 2.93%). We expect the weak CA profile to lead to moderate currency weakness, in line with the country’s flexible exchange rate regime. Given the country’s growth and inflation outlook, we expect the MPC to keep the MPR unchanged throughout 2021. In the same vein, we think the fiscal deficit will moderate in 2021, given a better revenue performance underpinned by the reopening of the economy. We also expect the Government to explore the Eurobond market in 2021 to support government expenditure.

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