Ghana’s macroeconomic environment in 2016 indicated a marked improvement in the near term economic outlook as the sustained Cedi stability (despite threats of a relapse in Q4-2016) and the enhanced fiscal efficiency triggered a return to macroeconomic stability.
The Cedi’s impressive outturn in 2016 is anchored on the continued tight monetary stance, reduced fiscal dominance in monetary policy, an increase in offshore appetite for Ghana’s domestic debt securities and a general firming of investor confidence. The efficiency gains from the ongoing IMF-supported fiscal adjustment program has resulted in a narrowing of the fiscal deficit, creating fiscal buffers and containing demand- side pressures to restore macroeconomic stability. Notwithstanding the emerging macroeconomic stability, the double-digit inflation endured in 2016 with the tight monetary policy stance, and the weak growth momentum underscore a fragile state of macroeconomic stability.
The Ghanaian authorities presented a 2016 supplementary budget to the country’s legislative house in Jul-2016 with revised projections for most of the key macroeconomic indicators. The government trimmed its FY-2016 projected growth for real GDP by 130bps to 4.1% (Databank Research: 4.0% ± 50bps) as economic activity struggles to rebound vis-à-vis the constrained domestic and unfavourable external environment. The growth concerns were emphasized by the IMF’s downgrade of Ghana’s growth expectations for 2016 to 3.3% (-120bps compared to earlier forecast).
We perceive the downward revision to Ghana’s growth forecast as necessary to reflect the downside risks posed by; the lower than projected crude oil price (earlier in 2016), challenges with the turret bearing of the Jubilee FPSO, low productivity in the agricultural sector and the uninspiring growth in bank credit to the private sector (with NPLs at 19.1% in Sep-2016).
Ghana’s overall real GDP growth of 2.5% in Q2-2016 compared to a 6.2% growth for non-oil GDP reflects the downside risks from the oil sector. Hydrocarbon production at Ghana’s main oil field (the Jubilee oil field) suffered a major setback with the turret bearing of the FPSO in Feb- 2016, necessitating a shutdown between April and May 2016. This constrained crude oil production to an average output of 69,500 barrels per day during 1H-2016 with an estimated 85,000 barrel per day for 2H-2016 (as estimated by Tullow Ghana). Consequently, average production at the Jubilee oil field for 2016 is estimated at 74,000 barrels per day, representing a year- on-year shortfall of 28,600 barrels per day. The commencement of production on the TEN oil fields in Aug-2016 (with an initial productivity of 20,000 barrels per day) would partly compensate for the daily shortfall at the Jubilee oil fields.
Our estimations however indicate that the output gain from the TEN oil fields from mid-August to Dec-2016 would be insufficient to fully compensate for the total shortfall at the Jubilee fields in 2016. With the repair works on the Jubilee FPSO expected to be fully completed in 1HY- 2017, hydrocarbon production could remain subdued in the early part of 2017 thereby requiring a cautiously optimistic view of the 2017 real sector outlook.
While we perceive the tight monetary and fiscal regime as necessarily to restore general macroeconomic stability, we view a rebound in the foreign exchange earning capacity of the economy as the key to sustaining the macroeconomic stability. Consequently, recovery in real growth in mining & quarrying, crude oil and the cocoa sub-sectors must be supported by value-added output in the manufacturing and non-traditional export sectors.
Welcome 2017: A New Dawn | A New Political Administration | A Wave of Expectations
The year 2016 would be remembered by many as a time when Ghana seized the opportunity to consolidate its enviable record of a stable political state with fast growing democratic credentials. The keenly contested but generally peaceful elections were concluded in Dec-2016 with a first round victory for the New Patriotic Party, admirably conceded by the incumbent and setting the stage for a new political administration in 2017. While the peaceful nature of Ghana’s elections would certainly not pass unnoticed by international investors, managing the divergent economic expectations provides the major hurdle for the new government in the first quarter of its administration. The perceived pro-market inclination should however provide the goodwill for a favorable takeoff for the new NPP-led government this year.
The heightened expectations about the new government was concurrently inspired by the challenging economic environment and the policy proposal of the NPP prior to winning the 2016 elections. Key among the policy proposals were: reducing the corporate tax rate to 20% (from 25%), removing import duties on raw materials and machinery for production within the context of the ECOWAS Common External Tariff (CET) protocol, abolishing the special import levy, abolishing the 17.5% VAT on imported medicines not produced in the Ghana, abolishing the 17.5% VAT on fee-based financial services, abolishing the 5% VAT on Real Estate sales, reviewing withholding taxes imposed on various sectors (including the mining sector).
The proposed recalibration of the tax system is aimed at switching taxes from a purely revenue generation instrument (as perceived under the NDC-led administration) to an incentive-based system for efficient allocation of economic resources. The justifiable view that the private sector is the largest employer of labor and that taxes can be used to influence the allocation of resources within the private sector was the main motivation for these proposals.
While these tax measures are justified on the basis of the medium term boost to economic activity, the short term implementation on a large scale as proposed remains doubtful. The ongoing fiscal adjustment program with the IMF would be a major impediment to the full implementation of these tax incentives in 2017 as the Fund program would require analysis of the fiscal impact. The year- end 2016 fiscal deficit data would also be very key in determining whether the IMF would tolerate some tax cuts in 2017.
Fiscal deficit as at Sep-2016 was 5.9%, exceeding the year-end target of 5.0% ahead of the Dec-2016 elections which heightens the risk of fiscal overrun. A 2016 fiscal deficit outturn in excess of the 5.0% agreed with the IMF could limit the scope for significant implementation of the tax measures proposed by the NPP in 2017. At a compromise level, the 5% Fiscal Stabilization Levy and the 17.5% VAT on fee-based financial services could however be considered for immediate removal in 2017 as the resultant shock to the revenue stream could be minimal. Alternatively, the Fiscal Stabilization Levy may be maintained while the Corporate Profit tax is reduced by 5% to 20% as stated in the party’s manifesto. The impact of the two policy choices would however depend on the contribution of each type of taxes to total revenue. The declining interest rates on treasury bills should result in a relatively lower debt service cost in 2017 while the anticipated commencement of the Sankofa-Gye Nyame oil production in Q2-2017 raises the outlook for some tax cuts in 2017. Gas production (which is the major deposit) at the Sankofa-Gye Nyame field would not commence until 2018, extending the bulk of expected cash flow to 2018, potentially delaying the implementation of some cuts beyond 2017. In conclusion, while the boost in oil and gas production and the new political administration signals the dawn of a new era and offers a wave of optimistic macroeconomic outlook, a cautious optimism about 2017 is crucial.
The 2017 fiscal year remains anchored on the IMF program which limits the size of fiscal expansion that can be embarked upon in the short term. Consequently, while 2017 appears promising, especially on economic front, we expect the bulk of policy proposals to be implemented from 2018 by which time the IMF program would expire, affording the Ghanaian authorities more fiscal space to execute its
fiscal agenda.