Ghana’s External
Ghana’s President Nana Akufo-Ado

Ghana’s External Deficits Account Estimated to 4.4% of GDP

In the Sub-Saharan African (SSA), Ghana has been noted to have low external financing risk, though virus induced pressure is estimated to widen the country’s external deficit.

The Institute of International Finance (IIF) in a report noted that the country financing risk is relatively low compare with Nigeria, Zambia others.

Though, on a balance of numbers, the Institute estimated that the country’s external deficits will widen to $2.8 billion or 4.4% of the gross domestic products (GDP).

However, the Institute added that even though this represents a reversal of the positive dynamic in recent years, considering the circumstances, the deterioration is moderate.

It stated that lower export volumes as a result of the COVID-19 induced global recession contribute to a wider current account deficit, while higher prices for Ghana’s most important export, gold, will offset some the effect.

The macro notes recognised that Ghana entered the COVID-19 shock in a better position than most of its regional peers.

“Ghana successfully completed a four-year Extended Credit Facility (ECF)-supported IMF program in early 2019.

“This also include achievements ranging from sustained high economic growth, inflation near the central bank’s target,

“…a primary budget surplus while ending monetary financing of the deficit, and an improved external position”, the Institute highlighted.

Furthermore, Ghana was able to tap international markets with a $3 billion Eurobond issuance in early February.

After the onset of the COVID-19 shock, the country was able to gain board approval for the disbursement of $1 billion under the IMF’s Rapid Credit Facility (RCF).

“As a result, and despite the negative impact of sharply lower oil prices on Ghana’s current account, we expect reserve losses to remain moderate and assess external risks as relatively low”, the Institute said.

Nigeria to record current account deficits

Recall that Ghana entered its most recent IMF program in April 2015.

Meanwhile, data shows that key macroeconomic indicators have improved markedly over the four year program period.

“First, economic growth rose significantly and averaged 7% over 2017-19.

“Over the same period, Ghana achieved a primary central government surplus of 1% of GDP, reduced its current account deficit to below 3%, and grew international reserves to above three months of imports”, the macroeconomic note reads.

It stated that by March 2020, gross reserves had risen by another $1.6 billion.

As a result, the institute explained that the country was in a relatively strong position entering the COVID-19 related growth and balance of payments shocks compared to its regional peers, including Nigeria and Zambia.

Contributing to the more positive picture is the fortunate timing of a $3 billion Eurobond issuance in early February.

The bonds, which included a 41-year paper—the longest maturity on record in SSA, were five times oversubscribed and sold at relatively low coupons (6.375-8.875%) for a country now rated as highly speculative, IIF stated.

With crude oil accounting for almost one-third of total goods exports, Ghana will be significantly affected by the sharp drop in oil prices since the beginning of the year.

“We estimate, taking into account the positive effect on petroleum imports; that the change in oil prices alone will lead to $850 million decline in the goods balance”, IIF said.

Lower export volumes as a result of the COVID-19 induced global recession also contribute to a wider current account deficit, while higher prices for Ghana’s most important export, gold, will offset some the effect.

Overall, IIF explained that it expects the country’s external deficit to widen to $2.8 billion or 4.4% of GDP.

Even though this represents a reversal of the positive dynamic in recent years, considering the circumstances, the deterioration is moderate.

Ghana’s External
Ghana’s President Nana Akufo-Ado

IIF however stated that it presents a middle-of-the-road scenario, assuming that non-resident FDI in 2020 will be the lowest in ten years and resident outflows will be somewhat larger than in the past.

However, while some portfolio investors may exit, $3 billion in Eurobond issuance.

And more than $1.3 billion in multilateral support- $1 billion under the RCF and $300 million from the World Bank- will keep reserve losses at a moderate level ($800 million).

Over the medium term, IIF explained that financing needs as a result of debt amortization appear manageable.

But, Eurobond repayments of $1 billion each in 2023/26 could be a challenge if COVID-19 aftershocks persist for longer.

Meanwhile, the commodity price shock poses a risk to Ghana’s fiscal accounts as well, the Institute stated.

The IMF estimates that the COVID-19 shock will reduce projected 2020 revenues by more than GHS8.5 billion, of which roughly GHS5.6 billion represent lost oil revenues.

At the same time, the government is planning to spend GHS1.6 billion on relief measures and cut expenditures by GHS2.6 billion.

“We expect that the deficit will widen from 3.8% of GDP in 2018—and estimated 4.8% in 2019—to 6.4% this year.

However, the fiscal outlook depends primarily on the duration of the COVID-19 recession and accompanying commodity price shock.

Furthermore, the general election in December raises the risk of fiscal slippage.

IIF reckoned that the central bank in mid-May purchased a GHS5.5 billion government COVID-19 relief bond at the monetary policy rate of 14.5% and stated that it could buy an additional GHS4.5 billion in the future, if necessary.

“This monetary financing of the government could be a trigger for larger portfolio outflows.

“Currently, nonresidents account for roughly 25% of Ghana’s domestic government debt, and maturing debt would likely not be rolled over in this case.

“An additional risk is that the central bank may sell reserves to avoid a too-sharp depreciation of the GHS before the election”, the Institute stated.

Ghana’s External Deficits Account Estimated to 4.4% of GDP by Julius Alagbe

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