April 1, 2022/Cordros Report
In Q1-22, investors’ concerns about the Ghanaian macroeconomy were primarily centred on fiscal policy, given rising fiscal slippages. In addition, we highlight that Fitch and Moody’s sovereign credit downgrade aggravated the concerns. Meanwhile, the country’s headline inflation maintained its uptrend just as the pressure on the domestic currency intensified. At the same time, the Monetary Policy Committee (MPC) of the Bank of Ghana (BOG) raised the key policy rate by 250bps to 17.0% at its second policy meeting for the year. In this report, we examine the state of the Ghanaian economy and update our views on inflation, currency, monetary policy path, and fiscal policy.
Fiscal Policy: Will the Government Achieve its Fiscal Deficit Target?
In our fiscal policy note (see report: Will Ghana Default on its Debt?), we highlighted that the Ghanaian government has moved from a revenue-led fiscal consolidation plan to an expenditure-led path for 2022FY, given the concerns stemming from (1) sovereign credit downgrade by Fitch and Moody’s, (2) tightening of global financial conditions, and (3) uncertainties regarding the revenue framework. Since our last publication, there have been some notable developments. Specifically, the government held a retreat on 19th March, where it announced additional fiscal consolidation measures intending to achieve a 7.4% fiscal deficit to GDP ratio in 2022FY (2021E: 9.8%). The critical expenditure cutting measures include; (1) an additional 10.0% cut in discretionary spending and (2) a 30.0% cut in salaries of Ministers and heads of State-Owned Enterprises (SOEs) from April to December. In addition, the government intends to issue up to USD2.00 billion in syndicated loans by 30th April in line with the 2022FY external financing plans. Meanwhile, the Parliament passed the long-awaited e-transaction levy bill on 29th March.
Inflation: Inflationary Pressure Biased to the Upside over the Short Term
The inflation rate rose by 184bps to 15.73% y/y in February, representing the ninth consecutive month of increase and the highest since October 2016 (15.77% y/y). The persistent inflationary pressure has been consistent with the pass-through impact of (1) persistent increase in global energy prices, (2) currency pressures, and (3) low food supply. Accordingly, price pressures increased across the food (17.36%% y/y vs January: 13.67% y/y), and non-food (14.47% y/y vs January: 14.15% y/y) baskets.
Monetary Policy: MPC Delivers Biggest Rate Hike on Record
Contrary to market expectations of a 100bps hike in the Monetary Policy Rate (MPR), the Monetary Policy Committee (MPC) of the Bank of Ghana (BOG) voted for an increase by 250bps to 17.00% at its March policy meeting. Asides from that, the Committee voted to (1) increase the Cash Reserve Ratio (CRR) to 12.0% from 8.0%, (2) reset the Capital Conservative Buffer to the pre-pandemic level of 13.0% (previously: 10.0%), and (3) raise the interest rate on the Other Loans Exceptionally Mentioned (OLEM) category back to the pre-pandemic level of 10.0% (previously: 5.0%).
Currency: Pressure to Persist without Significant FX Inflow
Since the start of 2022FY, the GHS has come under increased pressure against the USD. For context, the GHS has depreciated by 15.6% YTD against the USD to GHS7.12/USD (30th March). The magnitude of weakening in the GHS in Q1-21 alone is already well above the 2021FY depreciation rate (4.1%). For us, this reflects FX demand pressure from foreign investors, given the rising concerns about Ghana’s debt sustainability. Asides from that, we believe the currency pressure was also impacted by increased FX demand from local corporates for their business needs. That said, the gross FX reserves declined by 1.5% to USD9.55 billion (or 4.3 months of import cover) as of February 2022 compared with USD9.70 billion (or 4.4 months of import cover) in December 2021.
