GHANA: Despite new oil deals, crashing oil prices are likely to increase debt concerns
President Nana Dankwa Akufo-Addo in February announced that outstanding contract issues with Norwegian engineering company Aker Solutions had been cleared, indicating that production in the Deep South West Tano offshore oil field could begin. Aker has won a USD4.5 billion contract to extract oil through a floating production, storage and offloading (FPSO) facility. Operations are due to begin by the end of the year. The statement fuelled optimism that the government could meet its daily production target of 420,020 barrels per day (bpd) in 2023, up from a projected 190,089 bpd in 2019. However, a looming global economic downturn, caused by COVID-19 outbreaks in Asia and Europe, could put a break on those plans.
Ghana's problematic extractives sector
Ghana’s promise of an oil-wealth boom has been repeatedly delayed since commercially viable offshore oil deposits were discovered in 2007. Both endogenous and exogenous factors have slowed the expansion of the industry. Delays have been caused by a maritime border dispute with Côte d’Ivoire – which ended with a favourable ruling for Ghana by the International Court of Justice in 2018 – and a series of technical problems at another FPSO in the Jubilee Field, the country’s largest. The field is owned by UK-headquartered oil company Tullow Oil, which is struggling to cope due to operational and policy challenges in Ghana as well as its other key African markets of Kenya and Uganda. Tullow said in December 2019 it was open to receiving offers from potential buyers, epitomising its troubles.
Since then the external macroeconomic environment has deteriorated considerably, signalling serious challenges to the industry, as well as Ghana’s overall economic outlook. Oil prices have crashed to below USD30 per barrel as of 16 March. This is a marked fall from the USD57 per barrel prices upon which revenue-targets are based. This signals a near-certain revenue shortfall for 2020, increasing the need to source funding elsewhere, either through credit or tax hikes. Compared to the regional average, Ghana is performing well with regards to tax collection, but the NPP government has repeatedly fallen short of its collection targets since 2017. As the global economy is now likely to contract, so will the amount of taxable revenue in Ghana, suggesting that resorting to credit will be the most pragmatic move.
COVID-19 consequences will fuel growing debt-burden
The severely worsened macroeconomic outlook since the beginning of 2020 bears resemblance to the commodity-price crash of 2014, which saw the debt-to-GDP ratio in several resource-rich economies in Sub-Saharan Africa, including Ghana, become unsustainable. Akufo-Addo’s government has managed to reduce public debt as part of GDP since it took office in January 2017, bringing it down to 63 per cent of GDP in December 2019. However, this is still above the 53.3 per cent of GDP which the International Monetary Fund considers sustainable for developing economies. Surpassing the limit increases the medium-term risk of debt-distress and makes economies vulnerable to shocks.
In the one-year outlook, declining foreign exchange earnings from oil exports carries other macroeconomic risks for Ghana. Although crude oil exports do not account for a majority-share of the national budget, they are important foreign exchange earners. Not only will this decline cause price fluctuations locally, complicating planning for purchasing managers, it will also make government-guaranteed euro/dollar-denominated debt more expensive. That will increase the government’s debt burden in the medium term, including for state-owned enterprises, potentially leading to a series of debt defaults. In addition, the government’s successes over the past three years in stabilising the banking sector, which was characterised by poorly capitalised banks and high rates of non-performing loans, could be upended due to an urgent need to improve access to credit to improve liquidity of the market. Such challenges are also likely to delay ongoing infrastructure expansion projects until the situation has normalised. Investors looking for market entry should factor such systemic risks and vulnerability to the economy into their longer-term investment plans, including by taking into account the level of exposure to in-country partners or local value chains.