Ghana Business Forecast Report Q1 2009

Falling Commodities To Dent Growth In 2009

Ghana is set to feel the effects of a deteriorating external environment over the coming quarters. Although the nation has suffered relatively mildly in the midst of the crisis, thanks to the low exposure of the banking sector to US subprime mortgages, the effects will certainly be felt over the longer term. In particular, the onset of a recession in many developed states including the US and UK augurs for falling prices for key commodity exports such as cocoa and gold, as well as weak remittances. At the same time, the global shortage of capital will prevail during the course of this year at least, meaning lower investment inflows and subdued private consumption. On the domestic scene, the December 7 2008 presidential and parliamentary elections will be a key event. Looking to the medium term, the forthcoming oil boom will bring a marked improvement to the macroeconomy, albeit requiring prudent management from the authorities and testing Ghana's relatively young institutions.

The December elections will be an important test of Ghana's democratic credentials. Although the stepping down of President John Kufuor brings some risk of instability, we believe the transition to a new polity is likely to be relatively smooth. The frontrunners of the elections the ruling New Patriotic Party (NPP) and the National Democratic Congress (NDC) have broadly similar stances, giving us cause to believe the risks to economic policy are relatively mild. We maintain our view that a runoff for the presidency is a likely scenario. Key election issues will be the tackling of rising crime, the creation of jobs and the management of forthcoming oil revenues.

On the macroeconomic front, Ghana will suffer the fallout from the global financial crisis, with adverse global headwinds set to reduce real GDP growth to 5.1%, from an estimated 6.4% in 2008. The fiscal deficit has widened owing to profligate preelection spending, and will require austerity going forward. Falling commodity prices augur for the maintenance of a wide current account deficit in 2009, and consequent downside pressure on the cedi. We are forecasting a current account deficit equating to 18.4% of GDP, and currency depreciation of over 14% to GHS1.4000/US$ in 2009. The onset of domestic oil production in 2010 will be a key turning point, however, bringing a remarkable transformation of the current account into surplus, and prompting a turnaround for the Ghanaian cedi.

The business environment benefits from a favourable political climate and the economic reforms of recent years, which include gradual liberalisation of the capital account. Ghana suffers less from corruption and graft than other countries in the region, although it is widely thought that governmentrelated corruption is increasing. In Transparency International's 2008 Corruption Perceptions Index, Ghana is ranked 67th out of 180 nations, and receives a score of 3.9 out of 10.0. Notable weaknesses in the business environment persist, with infrastructure reining in the potential for economic expansion. The development of nuclear power is one means through which power shortages will be tackled.