Events in the Ghanaian markets are reflective of the occurrences in the global economy. In 2023 the global economy is expected to grow at 2.8 per cent.
This is a reduction from the reported growth of 3.4 per cent in 2022. Analysts anticipate that global economic growth will stabilise at 3.0 per cent in 2024.
Economic growth in advanced economies is predicted to fall sharply from 2.7 per cent in 2022 to 1.3 per cent in 2023.
In a probable alternative scenario with additional financial sector stress, global growth may fall to 2.5 per cent in 2023, with advanced economies growing at around one per cent.
The International Monetary Fund indicated that as central banks have increased interest rates, inflation has been on the decline. However, there are persistent price pressures due to tight labour markets in several economies.
The rapid increase in policy rates is starting to have unintended consequences, as concerns about the banking sector’s vulnerabilities and contagion risks across the broader financial sector, including nonbank financial institutions, have emerged.
The global headline inflation is set to fall from 8.7 per cent in 2022 to 7.0 per cent in 2023 on the back of lower commodity prices, but underlying (core) inflation is likely to decline more slowly.
Inflation’s return to target is unlikely before 2025 in most cases. Also, the natural rate of interest is important as it’s a good gauge of the stance of monetary and fiscal policies and a key determinant of the sustainability of public debt.
The world economy in 2022 was influenced by various factors, and these forces are expected to continue in 2023, albeit with some changes.
Debt levels remain high, which limits the ability of fiscal policymakers to address new challenges.
Commodity prices, which initially spiked due to Russia’s invasion of Ukraine, have now stabilised. However, the war and geopolitical tensions persist.
There were widespread outbreaks of new infectious COVID-19 strains last year, but countries like China, which were heavily affected, are showing signs of recovery, leading to improved supply-chain operations.
However, there are still significant risks and uncertainties, particularly due to the banking sector turmoil in Europe and America in Q1 of 2023.
The war in Ukraine significantly impacted the global economy, hampering access to European gas imports from Russia and disrupting trade flows, particularly for energy and food.
The magnitude of these interruptions is determined not only by the decline in exports resulting from the conflict but also by the global supply and demand elasticity.
The Ghanaian economy
The Ghanaian economy appears to have been impacted significantly by happenings in the global economy.
In the first quarter of 2023, Ghana’s domestic economy showed signs of weakness, with a slowdown in GDP growth despite renewed confidence among consumers and businesses.
The approval of the IMF Extended Credit Facility (ECF) package, in the amount of USD3.0 billion, during the second quarter of 2023 bolstered recovery efforts aimed at restoring macroeconomic stability and debt sustainability.
This also assisted in restoring investor confidence in the domestic economy.
The forecast growth rates are on the assumption that the government will successfully implement the ECF programmes’ fiscal and structural reforms necessary to achieve macroeconomic stability in the medium to long term.
The structure of the economy in 2023 is predicted to remain largely similar to the prior year.
The agriculture sector is anticipated to grow by 2.6 per cent in 2023 and by an average of 4.0 per cent over the medium term, i.e. from 2023 to 2026.
Industry sector growth is anticipated to increase in 2023, but still be favourable at 3.9 per cent.
Over the medium term, the sector is anticipated to have a consistent and strong average growth rate of 5.4 per cent.
With a predicted growth rate of 1.7 per cent in 2023, the services sector is projected to slow down.
However, over the medium term, it is anticipated to progressively accelerate and record an average growth rate of 3.5 per cent.
Inflation
Headline inflation in Ghana is gradually decreasing, attributed to synchronised monetary policy tightening and improved supply chain conditions.
From March 2023 to April 2023, Ghana’s headline inflation dropped from 45.0 per cent to 41.2 per cent. This represents a cumulative decline of 12.9 per cent since the beginning of the year.
Notably, both food and non-food inflation decreased by 11.1 per cent and 14.5 per cent respectively.
The easing of inflation can be attributed to monetary policy tightening, exchange rate stability, and declining international crude oil prices, which have facilitated downward adjustments in ex-pump petroleum prices.
However, despite the decline, the headline inflation rate remains high, further eroding the purchasing power of the average Ghanaian.
The IMF ECF programme is expected to further bolster the government’s efforts to reduce inflation to reasonable levels.
The programme includes the implementation of structural reforms on tax policy, revenue administration, and public financial management.
These measures will potentially help address underlying issues that contribute to inflationary pressures, such as excessive government spending, unsustainable debt levels, or structural inefficiencies in the economy.
In the short term however, the IMF programme reforms could potentially lead to temporary price increases or inflationary pressures.
This hinges on the Government’s efforts to reduce fiscal imbalances or implement structural reforms that may affect prices in certain sectors.
The IMF programme notwithstanding, various other factors, such as external shocks, global commodity prices, and domestic demand dynamics, can also influence inflation outcomes.
Government is targeting a headline inflation rate of 18.9 per cent at the end of December 2023 and 8.0 per cent ± 2 in the medium-term. To achieve this will require lots of discipline and hard work.
Interest rates
The Monetary Policy Rate (MPR) rose significantly from 17.0 per cent as of April 2022 to 29.5 per cent as of April 2023, signifying close to a 74 per cent increase in the MPR within a space of one year.
The Monetary Policy Committee (MPC) of Bank of Ghana increased the MPR on a regular basis in 2022 in response to general price increases. Although the rate of price increases started to trend downward at the start of 2023, the MPC continued to review the MPR upward with a 100bps increase in January 2023 and 150bps increase in March 2023, aimed at achieving price stability.
Similar to the MPR, treasury bill rates increased significantly in 2022. In view of the strong inflationary pressure in the economy in 2022, interest rates on treasury bills increased substantially.
As at December 2022 interest rates on the 91-day and 182-day Treasury bills were 34.48 per cent and 36.23 per cent respectively. The upward trajectory continued into 2023 with interest rates on 91-day and 182-day Treasury bills registering 35.4 per cent and 35.6 per cent as at 27 February 2023. In a bid to force down the rates, the Government, on 03 March 2023, rejected all the bids for the sale of Treasury bills from investors. This reduced interest rates on 91-day and 182-day Treasury bills to 24.2 per cent and 26.6 per cent respectively as at 06 March 2023. The average commercial banks lending rate has a positive correlation with the treasury bill rates.
As a result of the reduction in inflation in 2023, interest rates on treasury bills have also started to decline. Expectations are that the IMF ECF will spur the rate decline in interest rates in the long term as the macroeconomy begins to record stability.
Over the course of 2022, the Ghana Cedi depreciated against major trading currencies. While the Ghana Cedi to United States Dollar exchange rate was GH₵6.02/USD in January 2022, it ended the year at GH₵8.6/USD in December 2022. This represents 42.8 per cent depreciation. The trend was similar for other major foreign trading currencies. The Ghana Cedi recorded depreciation of 26.8 per cent and 34.8 per cent to the Great British Pound (GBP) and the Euro (EUR) respectively in the same period. The Ghana Cedi recorded relative stability following the IMF ECF staff level approval in December 2022.
The local currency has been fairly stable against the dollar in the first quarter of 2023, with an average dollar rate of GH₵10.9/USD.
The currency is expected to remain fairly stable for the rest of the year given the Board approval of the IMF bailout programme.
The impact of DDEP on the economy and financial sector
In 2022, Ghana’s total public debt reached unsustainable levels. As at November 2022, the country’s total public debt was GH₵575.7 billion representing 94.3 per cent of GDP (Summary of Economic and Financial Data, 2023, Bank of Ghana).
The economy was at the verge of collapse. Government consequently resorted to the IMF for a bailout.
To meet IMF’s requirements for a bailout, Ghana needed to reduce its existing debts to sustainable levels and this necessitated a restructuring of the country’s debt which started with the Domestic Debt Exchange Programme (“DDEP” or “the Exchange”).
DDEP was launched on 5 December 2022. Under the DDEP, debt holders were invited by Government [the issuer] to voluntarily accept to exchange their previous bonds and notes for a package of new bonds under new terms and conditions including much lower interest rates and longer tenors.
The Exchange involved a total of GH₵137 billion of domestic notes and bonds, including E.S.L.A. and Daakye bonds.
We note that the DDEP excluded Treasury Bills in totality, and notes and bonds held by individuals (natural persons).
The first round of DDEP closed on Friday 10 February 2023 with about 85 per cent participation of eligible bonds, according to a Ministry of Finance website publication on 14 February 2023.
On 24 February 2023, S&P Global Ratings raised Ghana’s local currency sovereign credit ratings from selective default (SD) to ‘CCC+/C’. This suggests that default risk associated with the old bonds have been substantially addressed.
Similarly, on 09 June 2023, Moody’s Investors Service (“Moody’s”) upgraded Ghana’s sovereign local currency (LCY) long-term issuer rating to “Caa3” from “Ca”.
According to Moody’s, the rating upgrade was due to the successful domestic debt exchange programme (DDEP), which has yielded some fiscal reliefs to the Government.
Moody’s added that the upgrade notwithstanding, the “Caa3” rating continues to capture elevated redefault risk, which remains significant until the LCY debt that has not been restructured is settled and until the foreign currency debt is restructured.
In particular, the “Caa3” rating is consistent with default events leading to losses for private creditors in the range of 20.0 per cent – 35.0 per cent.
The second round of DDEP is underway, based on a Reuters’ publication on 28 June 2023.
According to the publication, the Government has advanced the process to restructure another GH₵123 billion ($11.18 billion) of public debt to qualify for the next disbursement under the IMF ECF programme.
The debt to be restructured comprises domestic dollar bonds, cocoa bills, pension funds and debt owed to the central bank.
According to Reuters, the Government and the lenders have agreed to convert domestic U.S dollar bonds totalling $808.99 million into two term loans with lower rates. Cocoa bills amounting to GH₵7.93 billion will also be converted into a new bond at 13 per cent yield.