On 15 November, Minister of Finance Ken Ofori-Atta will present his second mid-term budget during a period of rapid but fragile economic growth. To ensure continued financing of the government’s ambitious policy programme, Ofori-Atta promises to issue a mind-boggling USD50 billion 100-year bond. That would be the world’s first ’century bond’, which follows the series of publicly guaranteed bonds, worth over USD3 billion, the government issued last year to reprofile maturing debt and pay down outstanding credit contracted by Ghana’s many state-owned enterprises (SOEs). The full details of the century bond will likely be outlined in the 2019 budget announcement. The rapidly expanding public debt is likely to increase political risk in the two-year outlook.
Almost two years have passed since President Nana Akufo-Addo of the National Patriotic Party (NPP) was elected into government. When he took office he inherited a poor macro-economic outlook, caused by low oil output and revenue, slow non-oil growth, as well as a growing mountain of debt, including undisclosed liabilities worth USD1.6 billion which had been incurred in the last months of the former administration. This was in line with a historical trend in which sitting governments have allowed huge fiscal slippages, which have increased the budget deficit and caused financing issues for the incoming government. Furthermore, in January 2017 Akufo-Addo announced a review of contracts signed under the previous administration, with the aim of renegotiating deals it deemed too costly for the country. In particular, the NPP government went after a company based in the United Arab Emirates, called Ameri Energy, which was supplying gas turbines to increase the country’s electricity capacity. The Akufo-Addo administration has charged that the project was seriously overpriced and that it would renegotiate the terms. In August, Ameri threatened to sue the government over late debt repayments.
Two years on, things are looking up for Akufo-Addo’s government, but underlying economic vulnerabilities remain. The macro-economic outlook has improved slightly through fiscal consolidation and rising global oil prices, a stabilisation of the cedi – the national currency – and a reduction of inflation and the public deficit, mainly through the staggering growth of oil revenue, which was enabled by the resumption of production at two key oilfields in 2017 and increasing oil prices globally. However, the economy remains vulnerable to external shocks, as real non-oil GDP growth appears to have plateaued, while the reprofiling of sovereign debt, and the ambitious early roll-out of key campaign promises, present additional risks to the economic outlook, and ultimately the government’s prospects for re-election in 2020. These include rising levels of debt, unsatisfactory levels of revenue collection, vulnerability to external shocks and tightening financing conditions in advanced economies.
Collapsing house of cards?
Symptomatic of this are the fluctuations that have rocked Ghana’s financial sector over the past year, with a high share of non-performing loans (NPLs) forcing some banks to merge or shut ahead of new capitalisation requirements which come into effect on 31 December. To meet international standards, the Bank of Ghana (BoG) – the country’s central bank – in September 2017 announced it would raise the minimum capitalisation level of banks operating in the country to GHS400 million. Globally, however, Ghana’s banking sector is well-capitalised and liquid but structural and governance problems are likely to lead to further consolidation of the market; on average the ratio of non-performing loans has increased over the past two years (see graph).
In August 2017, BoG ordered the closure of two indigenous banks – U.T. and Capital Bank of Ghana (CBG) – due to their very low capitalisation levels and high share of NPLs, a trend that is broadly consistent with the wider Ghanaian banking sector. One year later, local media alleged that Ibrahim Mahama, former president John Dramani Mahama’s brother, had been heavily in debt to U.T. This underscores the risk of exposure to politically exposed persons (PEP) across Ghana’s business community, as well as fluctuations in the banking sector due to the presence of high rates of NPLs. One year since the new capitalisation requirements were announced, five more banks have collapsed or merged with others, reducing the total number of banks operating in Ghana to 31. Among those, Consolidated Bank resulted from the merger of five local banks on 2 August. According to local media reports, it is wholly owned and managed by the Ministry of Finance and the BoG, a fact that is likely to fuel existing suspicions within parts of the business community that senior officials within the government are trying to make financial gain from their time in power.
The ever-larger mountain of debt and missed revenue targets
Such suspicions had already been raised by opposition figures after Ofori-Atta issued the government’s first USD2.25 billion bond. Responding to a complaint, the Commission on Human Rights and Administrative Justice – a local non-government organisation – stated in January 2018 that there had been some procedural issues with the bond, but that it found no evidence of a conflict of interest against Ofori-Atta, which the plaintiffs had alleged. However, as the minister prepares to issue the century bond, further allegations of mismanagement and conflict of interest are likely to be lodged by the opposition.
This reprofiled debt, while providing temporary budgetary respite and room for manoeuvre, is presenting the government with critical long-term budget challenges, as government-guaranteed debt remains above 70 per cent of GDP – well-above the International Monetary Fund’s (IMF) recommended 56 per cent maximum of public debt for developing countries. Against this backdrop, and despite the impressive levels of economic growth over the past year, Ghana’s debt levels are likely to weigh seriously on the long-term business environment.
Already the high levels of debt have reduced the government’s room for manoeuvre, as over 55 per cent of the budget is already channelled to wages and interest payments, and some SOEs continue to complain about outstanding debt hampering their finances, a trend that is trickling down throughout the Ghanaian economy. This includes GRIDCo – the state-owned electricity transmission and generation utility – whose executives warned in September that load-shedding could resume due to outstanding government-guaranteed debt. Should GRIDCo make good on its cautioning, this could see a return of the endemic and highly disruptive power cuts, which seriously hampered business activity and growth. While the issues during the crisis years 2012-2016 were mostly related to a lack of capacity, the issues facing Ghana’s energy sector this year are more related to poor electricity transmission and pitiful financial management over the past five years. This has created systemic risks throughout Ghana’s energy sector and value chain, problems which have also contributed to the uncertainty in the banking sector due to the high rates of non-performing loans held by some commercial banks and high exposure to SOEs.
Furthermore, the earmarking of at least ten government budget items – for instance using oil and gas revenue for social development programmes – has increased fiscal rigidity, which means that…