Ghana is set to be hit hard, from both a health and economic perspective, by the Covid-19 pandemic and oil price shock. According to statistics from the Johns Hopkins University on April 23, the country registered 1,154 cases of Covid-19 and nine fatalities, which currently makes it the country with the most cases in West Africa. The double demand shock will hurt the local economy through various channels. At this point in time the economic impact would be severe, with real economic growth expected to slow to a four-decade low of -0.9% this year.
The local partial lock down that lasted for three weeks would dampen local production as activity grinds to a near halt for a period of time. Moreover, the oil price plunge will create a further drag on economic activity. We expect the current account deficit to widen to $3.4bn (5.4% of GDP) this year, from an estimated $1.7bn (2.5% of GDP) last year. Given the lack of global demand, the disruptions in global supply chains, and travel restrictions, we expect the trade and services accounts to be hardest hit in 2020. Although gold prices continue to rise, it will do little to soften the blow, as demand remains weak. Previously, we highlighted that fiscal slippages in the election year remain our biggest concern; however, recent global events and the spillover effects thereof to the local economy dwarf those concerns. We now project the fiscal deficit to widen to 8.4% of GDP this year, from a previous forecast of 4.9% of GDP.
Economic impact of Covid-19 and oil price shock At this moment, the economic impact would be severe with real economic growth expected to slow to a four-decade low of -0.9% this year. The country would be hurt the most via the trade channel, as Ghana’s five biggest exporting destinations went into lockdown mode for an extended period, thus affecting local production significantly. It should be noted that we expect manufacturing to take more of a hit than oil and gold production during this period. In addition, the local partial lockdown that lasted for three weeks would further dampen local production as activity grinds to a near halt for a period of time. Moreover, the oil price war between Saudi Arabia and Russia, coupled with a lack of demand during the Covid-19 pandemic, led to a plunge in international oil prices, which will create a further drag on economic activity. Mineral fuel exports, the second-biggest exporting category, are expected to take a severe knock this year as a drop in demand and prices is set to hurt exports and production and weigh on economic growth.
Although tourism’s contribution to GDP is relatively low compared to other African countries, the imposed global travel restrictions are set to further hurt the economy. From a fiscal perspective, the government has limited fiscal space, as government debt has already reached elevated levels and the fiscal deficit was forecast to come in just below the 5% of GDP ceiling before Covid-19 struck. Nonetheless, given the recently announced fiscal stimulus measures, we expect the fiscal deficit to rise well above the 5% of GDP ceiling, while the government debt-to-GDP ratio is expected to increase further. Lastly, taking the aforementioned developments into account, we project unemployment to increase considerably this year, along with a big fall in FDI and reserves.
Current account deficit to widen significantly
Our outlook for the current account changed considerably over the past three months. After accounting for the effect of the Covid-19 pandemic and the oil price plunge, we now expect the current account deficit to widen to $3.4bn (5.4% of GDP) this year, from an estimated $1.7bn (2.5% of GDP) last year. Given the lack of global demand, the disruptions in global supply chains, and travel restrictions, we expect the trade and services accounts to be hardest hit in 2020. Although gold prices continue to rise, it will do little to soften the blow, as demand remains weak. The income account will feel some reprieve as the lower production and price environment will lead to lower profit expatriation.
Inflation to trend lower as demand drops
Consumer price pressures are set for some reprieve as demand weakens. The cedi, like most emerging and developing currencies, came under pressure amid the global financial meltdown. Although the cedi started depreciating, the plunge in international oil prices will outweigh the currency effect and as a result, we expect inflation to trend even lower to 7.3% over the short term. The expected lower oil revenues will force local authorities to curb expenditure somewhat, which will put further downward pressure on the inflation environment. The Bank of Ghana (BoG)’s substantial policy rate cut (-150 bps) in March is justified when considering the likely impact of Covid-19 and the drop in oil prices.
Fiscal deficit to balloon as revenues tank
The fiscal account outlook differs considerably from the one presented in our earlier publication. We previously highlighted that fiscal slippages in the election year remain our biggest concern; though, recent global events and the spillover effects thereof to the local economy dwarf those concerns. We now project the fiscal deficit to widen to 8.4% of GDP this year, from a previous forecast of 4.9% of GDP. While we do not expect expenditure to fall by much as government introduces fiscal stimulus measures to save the economy, we do project that fiscal revenues will fall significantly this year. The fall in commodity prices and subsequent drop in profits, the extended period of lockdown, the job losses, and so forth would all lead to much lower personal and business income tax collection.
Economic & Political Risk Update
Ghana’s overall risk score has deteriorated over the past quarter, which was to be expected, after we incorporated both the Covid-19 pandemic and oil price shocks into our forecasts.
Economic policy risk remains unchanged, as we see the effects of the double demand shock on both monetary and fiscal policy to be temporary. From a monetary perspective, we expect inflation to move lower due to the lack of demand and the much lower oil price environment in the short term. However, from next year onwards, we expect to see inflation rise again as demand and oil prices pick up again. On the fiscal policy side, we project a substantial widening of the fiscal deficit this year as revenues collapse and the government introduces fiscal stimulus measures to safeguard the economy. Nonetheless, we forecast that the fiscal deficit would return to baseline in the medium term.
Structure risk has deteriorated over the past three months, mostly driven by a worsened economic growth outlook over the short term. The partial lockdown that the country endured for three weeks, coupled with the spillover effects from the Covid-19 pandemic and oil price plunge, has prompted us to lower the country’s economic growth forecast to the lowest rate in almost four decades. We expect the slump in growth to have a more prolonged effect.
Liquidity risk moved sideways over the past quarter.
Over the short term, political risk stems from the challenges posed by the Covid-19 pandemic and the intensification of political rhetoric ahead of the December polls. Mr Akufo-Addo and the ruling NPP are expected to return for new terms, possibly with an increased majority, and whatever political instability develops over the election period is unlikely to last beyond it.
Economic Risk Comparison
Normally, we would compare Ghana’s performance on six macroeconomic indicators to the median performance of four of the continent’s fastest-growing economies; however, given the fact that we are in the process of updating all our forecasts due to the impact of Covid-19, a comparison with the peer countries would not be accurate. Nonetheless, for this round we focus on Ghana’s strengths and weaknesses when compared to its peers.
On the negative end of the spectrum, Ghana underperforms relative to both the African and fastestgrowing peer medians in the consumer price inflation, fiscal balances, and external liquidity categories. The country’s most salient weakness remains its fiscal balance and the subsequent public debt ratios. On the positive end, Ghana usually outperforms both the fastest-growing peer median and the African median in both the current account and foreign investment indicators. Presenting a more mixed performance, Ghana’s median economic growth rate over the medium term tends to be higher than that of the other countries on the continent, but when compared to the median of only the fastest-growing African peers, the country under performs.
Credit rating developments
Fitch Ratings affirmed Ghana’s sovereign credit rating at B/stable on April 21. In general, the agency stated that the affirmation of the rating reflects its view that the Ghanaian economy would make a swift recovery after the Covid-19 pandemic shock, and given the fiscal and external financing options available to the country. Moody’s Investors Service (Moody’s) affirmed Ghana’s sovereign credit rating at B3 on April 17, but the outlook on the rating was changed to negative from positive. The ratings agency decided to skip a step and not change the outlook back to stable after it previously changed the outlook from stable to positive in January 2020. Moody’s noted that the decision to revise the outlook to negative stems from rising risks, mostly emanating from the recent Covid-19 outbreak and risks related to the country’s funding and debt service. S&P Global Ratings (S&P) affirmed Ghana’s sovereign credit rating at B/stable on March 13. On April 9, the ratings agency said that the “outlook for sub-Saharan Africa is grim with few policy tools amid the Covid-19 pandemic”.