Bullish forecast on cedi

The cedi is expected to be more stable this year, but economic growth will moderate to 6.5 percent on account of fiscal tightening, emerging-markets investment bank Renaissance Capital has said.

Ghana’s economy grew by 7.1 percent last year, according to provisional data; but the cedi fell by 17.5 percent against the US dollar due to strong import spending and speculative activities.

“While we expect a strong growth recovery in the oil sector to be positive for output growth in 2013, we think expenditure growth is likely to be undermined by a slowdown in fiscal spending and smaller wage hikes,” said Yvonne Mhango, Renaissance’s sub-Saharan Africa economist.

“The cedi should fare much better than in 2012, and we forecast a moderate depreciation to GH¢2/US$1 in 2013, from GH¢1.9/US$1 in 2012. Inflation should average 9-10 percent,” she added.  

 The Bank of Ghana, which has held its policy lending rate at 15 percent since June 2012, should find room for a 150-basis-point reduction in 2013 on the back of stable exchange rates and inflation, she said.

After the budget deficit widened to 12.1 percent of GDP last year, Finance Minister Seth Terkper promised that Government will rein it in to 9 percent this year by boosting revenues and controlling expenditure.

Renaissance observed that Ghana is at an attractive stage of its development cycle due to the successful elections and transfer of power in 2012, and “ticks many boxes for us in terms of what we look for in fast-growing emerging markets.

“We expect the Jubilee Field’s peak production of 120,000 barrels per day to be reached in 2013. This implies a 40-50 percent increase in oil production in 2013 by our estimates, compared with a decline in 2012.

“We believe this strong improvement in production from the oil sector, Ghana’s third-biggest industry, implies significant upside potential for industrial growth in 2013. However, this will only have a positive bearing on industry if manufacturing’s growth recovers and construction activity is at least sustained.”

With the Jubilee gas pipeline expected to be operational in September, Renaissance said power shortfalls will ease and the cost of energy will be significantly reduced.

“We expect lower energy costs to boost households’ disposable incomes -- which is positive for consumption, and increases businesses’ profit margins. Lower energy costs will also increase the attractiveness of investing in Ghana, particularly in energy-intensive sectors such as industry.”

On interest rates, the bank said it expects fiscal tightening to place downward pressure on yields, and be positive for the inflation outlook.

“This implies positive real rates can be sustained, albeit moderately lower than they were in 2012. Although credit growth is quite strong in Ghana, we do not expect it to keep the Bank of Ghana from easing the policy rate in 2013. The risks to our interest rate view include an external shock that weakens the cedi and a local drought that pushes up food prices.”

Banking sector

Ghanaian banks completed a four-year regulator-driven capital-raising drive in 2012, ending the year with a 19 percent capital adequacy ratio against a 10 percent regulatory requirement. This forms a solid base to deliver strong credit growth over the next few years, according to Renaissance, which announced that it has begun coverage of the Ghanaian banking sector.

“The sector has a history of elevated NPL ratios -- and although the trend has been improving it has been sticky, trending down at around 13-14%. As we expect loan-growth to outpace NPL growth in 2013, this should lead to a fall in NPL ratios.

“Nonetheless, we note that the strong loan growth cycle we expect over the next few years could pose new asset quality challenges, especially for those domestic banks whose risk management standards are not comparable with those of the larger domestic and foreign banks. External shocks to the Ghanaian economy are also a risk to asset quality.

“Considering the higher returns the Ghanaian banks have delivered historically, we believe they deserve to trade at a premium to banks in other markets.”