Ghana: still a compelling duration trade
GDP growth: still strong
We expect 7.0% y/y growth in 2018 and 2019 thanks to strong oil-sector growth. Non-oil sectors will also deliver above-average growth over the next 3-y, helped by progress in public finance management. The Stanbic Bank Ghana PMI remained above 50, moderating from 55.2 in March to 54.5 in April. Private sector credit growth, however, only reached 13.8% y/y in February, from 17.5% y/y in the 12-m prior. To comply with the Bank of Ghana’s increased minimum capital requirements of GHS400m by the year-end, the entire sector needs a capital injection of USD800m to USD1.0bn. There is a strong possibility that this new requirement will trigger consolidation in the sector. Once the new requirements have been complied with, we expect credit growth to rise meaningfully, thus potentially boosting economic growth.
Balance of payments: funding still strong
The rising oil price trajectory, coupled with moderately rising import demand, implies that the C/A deficit will continue to narrow this year. We expect the deficit at USD1.7bn (3.3% of GDP) and USD1.0bn (1.7% of GDP) this year and next respectively. However, the strong rally in prices of cocoa (a commodity that accounted for 25% of export earnings last year) YTD should keep the trade balance in surplus. Imports will probably rebound moderately this year, after declining 2.0% y/y in 2017. In the first 2-m of this year, the trade surplus reached USD513.3m from USD498.8m a year ago. Gross FX reserves should continue rising this year as commodity prices remain elevated and portfolio inflows remain strong. Although moderating this year, it is reasonable to expect that FDI inflows will grow in 2019. Given foreign interest in the Ghanaian banking sector, we expect around USD400m in capital inflows triggered by the recapitalisation of the sector this year, bolstering the BOP. The issuance of USD2.0bn in Eurobonds earlier this month has bolstered gross international FX reserves. Net international reserves reached USD3.9bn as at end February from USD5.1bn in April 2017. We expect net FX reserves to rise steadily to USD5.8bn by year end.
FX outlook: range-bound
We see USD/GHS trading inside the forward curve this year. We expect the pair to close the year around 4.65, and we do not expect the pressure, which has taken the rate from near 4.4 over the last month, to become disorderly. We believe Ghana will continue attracting decent levels of foreign portfolio inflows. The changes to minimum capital for banks should also result in most banks being able to provide more liquidity due to larger net open positions.
Monetary policy: still an easing bias
We expect the BOG to ease further this year, possibly cutting the policy rate by 300 bps, which is warranted given the strong disinflation underway, with headline inflation dropping to 9.6% y/y in April from 10.4% y/y in March. Most of the recent decline in headline inflation is due to declining non-food inflation (which reached 10.6% y/y from 11.8% y/y in March). We expect the inflation trajectory to remain to the downside, with headline inflation bottoming out at 9.4% y/y in December, before rising to 12.0% y/y by end Q1:19. The BOG is looking to improve the transmission mechanism of its main policy levers. To that end, it introduced the Ghana Reference Rate (GRR) in early April, which forms the basis for pricing loans lent to the private sector. The GRR is made up of the policy rate (40% weight), the 91-d treasury bill rate (40%) and the overnight rate (20%).