GHANA/KENYA: Lessons from Accra
Ghana is rich in oil and gold but faces multiple challenges. Kenya might learn from Ghana’s mistakes and try not to repeat them
For the past three years, Ghana has been the poster child for investment into sub-Saharan Africa. The economy grew by 7% last year and is forecast to expand by 6.9% in 2013. The country had been garnering considerable international attention since the discovery of offshore oil by the explorer Tullow in 2007, but the onset of oil production coincided with a rebasing of economic data that catapulted it into middle-income status, so it is difficult to tell exactly what the impact of the discovery was.
In December 2012 another peaceful election returned the acting president John Mahama to office with a full mandate. But it was marred by a damaging challenge to the results by the opposition that dragged on through the Supreme Court until August. Despite the ongoing political worries, the government decided to test the appetite for the exposure to their growth story on the capital markets in July.
Accras decision to go to market with an international currency issue brought it on-trend. It was already the first West African country to issue a Eurobond, in 2007, and its growth story seemed compelling. There was also a proven appetite for African frontier debt: Zambia brought out a $750 million, 10-year issue in September 2012 after several years of flirting with the market. That issue was considerably over-subscribed, and, at a yield of 5.625%, cheaper for the country than many analysts would had expected. Investors were looking out for countries that could offer high yields along with growth to offset the falling yields and economic slowdowns in developed and emerging markets. There was also a glut of liquidity in the market, due to the continuing programme of quantitative easing in the US.
Zambias success sparked interest across the continent from sovereigns and parastatals. At one stage in early 2013 there was a pipeline of $4 billion-worth of deals being discussed in Zambia, including issues from the state infrastructure company and the muni-cipal government of the capital, Lusaka. One senior investment banker from the region, with knowledge of the deals under discussion, called several of them pipe dreams.
Rwanda came to market in April with a $400 million, 10-year Eurobond at 6.875% yield. Nigeria followed just over two months later with two issues: five-year and 10-year Eurobonds, both at $500 million, with yields of 5.375% and 6.625%, respectively. The next major nation likely to bring oil exports onstream, Kenya, also, finally, set a tentative November date for its debut Eurobond issue.
And yet, when Ghana finally came to market, it seemed that the boom was coming to an end. Ghanas $1 billion issue was oversubscribed by more than a billion, but investors demanded a relatively high interest rate of 7.875% considerably more than was paid by Rwanda, a far smaller country in a worse neighbourhood, a few months before.
Their timing was, analysts said, terrible. The chief economist of frontier markets broker Exotix, Stuart Culverhouse, called the decision to go to market during the summer lull rather stupid. International conditions no doubt had an impact the first loud discussions of the tapering of the US quantitative easing meant that investors began to face up to a future without the Federal Reserve dumping liquidity into the financial markets. However, the summer is generally far quieter, there is far less activity amongst investors and, consequently, Ghana paid a higher price for its debt.
Quite why you look to bring it out at that particular point I dont know. Markets are quieter during the summer. It might smack of desperation, which is again a further weakness. I think the timing was poor, Culverhouse says.
But the poor timing and weak external environment cannot hide the fact that Ghanas economic fundamentals have been deteriorating. A rise in public-sector salaries led to a budget deficit of nearly 12% of gross domestic product in 2012, which the government will rein in to 9% in 2013. The cedi has taken a battering too, falling to a record low of 2.13 to the dollar in September, and is down more than 11% since the start of 2013. Foreign exchange reserves, too, are low, falling below three months of imports in August.
Its almost as if the policymakers are sort of losing control and dont know how to respond, says Culverhouse, who was more bullish on Ghana at the start of the year, but changed his view in the spring. When youve got a budget deficit target of 9% of GDP for this year, which is pretty unambitious, and a target to get it to 6% by 2015, youve got the currency falling through the floor, and youre not really making any adjustment, I think people are beginning to get a little concerned.
There is also a concern that Ghana has been re-leveraging. Its debt to GDP ratio increased from 40.8% in 2011 to 49.4% in 2012. This is still a long way compared with the paralyzing debts of Greece or Italy, but the direction of travel is concerning some analysts.
Some of the proceeds of the Eurobond have been earmarked for infrastructure, ahead of funds from the oil industry becoming available for the same purpose. Ghana began pumping oil in 2010 and, following advice from other producing countries, created a structure of sovereign wealth funds for investment in infrastructure and social projects, as well as setting aside some of the cash for economic stabilization and to defend the cedi.
The early effects of the oil industry are being felt. Accra is in the middle of a real estate boom, and property prices have been rising by 10% year-on-year, driving further investment into the sector. Some analysts had said that agriculture and related industries were showing signs of the so-called Dutch disease, in which other sectors suffer due to a commodity-driven rise in local currency; but with the cedi now lower than ever, how much of the decline can be attributed to the onset of oil resources is debatable.
Sam Brandful, who heads the Tullow Oil-backed Invest In Africa initiative in Ghana, says that the Ghanaian government was well aware of the potential for Dutch disease, and took appropriate steps to curtail it.
I would say that any downturn in agriculture is not as a result of oil production or government turning its attention away from agriculture to oil, he says. Brandful attributes the slowdown in the sector to changing policies by the government, which has reduced financial support for cocoa farmers and fishing communities.
It also has to do with changing attitudes among farmers to their industry, as international commodity prices fluctuate, and the lure of the city for the younger generation draws the next generation of farmers into urban centres and other areas of work perceived to be more lucrative and modern, he adds.
LESSONS FOR KENYA
For all the flurry of interest in oil, Ghana is still Africas second-largest gold producer; oil revenues are not forecast to surpass gold exports until 2016. The decline in gold prices since the highs of 2011 has dampened interest in the sector, and added another hurdle to the country as it looks to maintain the level of foreign direct investment it needs to maintain its pace of growth. But economic expansion alone will not be enough to convince investors.
Growth is positive, Culverhouse says. But if youre building a budget deficit forecast off very strong growth, why are you running such a huge budget deficit of 9% of GDP when youre supposed to be growing at 7 or 8%? And if you dont grow at 7 or 8%, whats that budget deficit going to be? I think people have been giving them the benefit of the doubt for a very long time.
In this context the question over whether or not the oil revenues will be managed for the long term has resurfaced. If the windfall is used to service government debt, itself used in subsidies and wage increases, then the countrys longer-term strategy could be compromised.
What happens in Ghana could be instructive for Kenya, on the other side of the continent. Kenyas March elections were closely watched for any sign of the violence that marred the 2007 poll. There was tension, but no severe problems. However, the government does have a continuing question over its legitimacy; not from the results at the ballot box, but from the appearance of both the president, Uhuru Kenyatta, and the vice-president, William Ruto, in front of the International Criminal Court. Kenya withdrew from the ICC in September, but its leaders could still face trials.
Analysts have said that a deadly attack on an upmarket mall in Nairobi in September, while bad for tourism and investment, might boost international support for Kenyattas efforts to rebuild the nation.
Kenya also wants to tap the capital markets for infrastructure spending. It was due to launch a $500 million Eurobond before its last elections, but the loss of international confidence and the subsequent global economic downturn put paid to that ambition. Now, several years on, it has upped the size of the bond to between $1.5 billion and $2 billion. Analysts are not convinced. One local banker warned that the money would most likely end up used to finance ongoing government expenditures, with the hope that oil revenues and hydrocarbon-driven growth would give them the space for capital investment further down the line. Just as in Ghana, there is also a mounting concern about the re-leveraging of government financing.
The debt burdens are pretty good by developed market standards, but they are not developed markets. They are still susceptible to shocks, and sudden stops in capital flows, Exotixs Culverhouse says. The debt ratios are not bad, but theyre going in the wrong direction. If you look at Kenya, its debt-to-GDP ratio is more than 50%. It wasnt that long ago it was under 40%.