OBG Event

13 Sep 2011

Emerging markets are extremely dynamic. In fact, if I were to take a look at all of the countries we cover – from oil-rich Gulf monarchies to industrialised Asian giants to BRIC-status African democracies – the one thing they all have in common is the pace of change.

Ghana is no exception. In many ways, the country is hardly recognisable from a few years ago. I don’t mean this visually. We may be in the brand new Movenpick hotel, but Osu and Jamestown still look a lot like they did when I first came to the country a decade ago.

However, thanks to a GDP revision, the launch of commercial oil production, a reduced fiscal deficit and an improved credit environment, Ghana’s economy has matured dramatically in just over 36 months.

The republic has vaulted into lower middle-income status, and now boasts an economy that has outperformed most of its continental peers, with a growth rate up to three or four times that of OECD countries. GDP, which was above $31bn last year, is forecast to rise by more than 13.7% this year. This is impressive but even last year, it increased by 7.7%, which in turn was more than double the 3.7% figure of the year before. 

The inevitable scourge of such rapid growth – inflation – has been improving over the first half of 2011, dropping to 8.6% at the end of Q2, down from more than 18% in 2008. The pace of decline may be affected by increased government wages and excess oil liquidity, but the downward trend looks likely to stick.

Most basic business measures look equally encouraging. It now takes 12 days to start a business in Ghana, less than one third of the average in Africa, and lower than the OECD average. It takes 19 days to export a container, down from 47 in 2006, and import times have dropped from 55 days to 29.

On the socioeconomic side, poverty is still a challenge, with over a quarter of the country’s 24m people categorised as impoverished, but life expectancy is above 57 years, and the literacy rate is 67% – better than nearly every other West African country.

This is not to imply that everything is perfect. Ghana has its fair share of challenges that constrict growth. But the country benefits from a number of comparative advantages that have allowed it to flourish even while its neighbours grapple with stagnation and instability.

There are several reasons for this, both man-made and natural. The sizeable youth population, for example, helps strengthen the long-term forecast, as does a well-defined investment act. But there are five key factors that we see as truly pushing growth.

Perhaps the single biggest advantage that Ghana enjoys over the vast majority of its neighbours is that of stability. Ghana has developed a reputation for robust democracy and for good reason. Voter turnout tops that of democracies in Europe and North America, which has resulted in two peaceful handovers of power and twenty years of steady economic policy.

Natural resources are also a huge blessing. While commodities can equally be a curse, both gold and cocoa have helped to underwrite large swathes of Ghana’s development, and with the introduction of oil, things will only improve further.

Even with this natural richesse, the market is still notably diverse by continental standards. Services represent more than half of GDP and growth in tertiary areas such as banking, hospitality and telecoms has been impressive. 

As part of this, the ongoing evolution of the country’s business environment is a key contributor to growth. Legislative reforms have dramatically improved access to services, and the government has taken a number of steps – most noticeably in the financial arena – to reduce bureaucracy and increase transparency.

Finally, there is the issue of regional integration, which allows Ghana to tap into a market of some 300m people in 16 countries. While full monetary union through ECOWAS may be some ways off, the lowering of tariffs and the development of everything from transit corridors to joint passports offer immense potential.

It is in this context that we see five specific sectors that will define the country’s economic performance in the coming years.

These select growth areas have the ability to propel the country’s economy forward at an exponential rate, particularly if planned reforms are implemented. And they each offer not only opportunities for foreign capital and expertise, but also sizeable benefits for local firms looking to expand.

The first growth area comes as no surprise: natural resources.

Ghana’s commodity economy benefits from a comfortable revenue stream when prices are high, but grapples with shortfalls and slower growth when prices are low.

But, for better or for worse, the country’s natural wealth will continue to be one of the biggest motors of the economy for years to come.

Nowhere will this be more evident than with the start of commercial oil production. Production may be comparatively modest – don’t expect to see any Gulf-like transformations in Accra – but it is a big step for the country, bringing an influx of new capital and expertise, as well as opening up space for a range of new infrastructure, like pipelines and processing facilities.

And while black gold might be what everybody is talking about these days, it is the traditional yellow stuff which has long dominated exports. With prices surging past $1900 an ounce in recent months, this year will see a dramatic boost in revenues as production continues to climb. Similarly, for a country that once boasted the largest aluminium smelter in Africa, bauxite reserves offer additional potential.

Next is industry. The success of economic diversification, which is vital for Ghana, hinges on the growth of industrial output.

Raw materials have long dominated Ghana’s export activity, but it has a surprisingly wide base for manufacturing, processing and industrial production – from timber to plastics to food processing and textiles. Yet industrial goods comprise only 7% of exports, and while input tariffs and infrastructure do limit growth, there is enormous room for expansion. 

In spite of fears of Dutch disease, Ghana’s commodity wealth is a huge potential boon for industrial investors. Obviously, the prevalence of things like oil palm and bauxite provide accessible inputs, but more importantly, oil production will give the sector a major boost, improving electrical supply, lowering feedstock prices, and attracting additional liquidity.

Two more key growth areas, which may sound odd given their limited size and fragmented nature, are the banking sector and capital markets.

Ghana’s banking system is petite compared to markets like Nigeria or South Africa, but it does have a sophisticated network of players, whether we’re talking about universal banks or susu collectors. The vast untapped market in both retail and corporate, combined with the relative familiarity people have with informal financial services, means that the sector is ripe for rapid growth.

The country has a developed bond market, extensive investor infrastructure, and lots of foreign interest, and in recent months, saw a massive new listing of Tullow. From our standpoint, Ghana’s stock exchange has virtually everything an investor could want – with one glaring exception: it needs a boost in equities listing and trading. But with pension reform on the horizon, things are looking bright.

Finally, we also see agriculture as a key short, medium and long-term economic driver.

Ghana’s status as a middle-income economy means that some areas of the economy have moved well up the value chain, but agriculture continues to employ over half of the working population and accounts for around a third of GDP.

Ghana’s biggest crop is cocoa. It is the second largest producer in the world (and aiming for number one) and an estimated 17% of the population rely on it for their income. However, other crops also offer substantial returns, for example, in neighbouring Burkina Faso accounts for 8% of GDP, and Ghana’s northern stretches offer vast potential for the crop – which is why the government has launched its “white gold” initiative.

Oil palm crops could also be further exploited. Ghana now imports palm oil from Malaysia – a country that once looked to Ghana for lessons on how to develop its own plantations decades ago. 

While these sectors offer returns and opportunities to whet the palate of any interested investor, there are still a number of challenges that need to be tackled.

Among the most salient is that of economic diversification. Ghana’s GDP has expanded at breakneck speeds in recent years, but the country’s fate is tied up with those of the raw materials it exports – gold, cocoa and now, oil. In the 1970s and 1980s, massive inflation, stagnant growth and huge deficits showed all too clearly the problems this dependency can cause.

A similarly crucial issue is fiscal policy, which for decades has been the Achilles heel of Accra’s otherwise impressive economic management. This is particularly important with the advent of oil collateralisation. Of course, it’s easy to talk about cutting spending and raising income, but as the US Congress has ably demonstrated, actually doing it is extremely complicated.

There are more fundamental hurdles as well. The size of the informal market represents a significant drag on the entire economy, and limits employment and growth. 

Regional disparities are also a concern. Development in the Northern regions has generally lagged behind that of the South. Sustenance farming still plays a disproportionately large role there and poverty levels are uncomfortably high.

Finally, accessing domestic financing is a constant struggle, whether you are a farmer, an oil man, or a small business owner. High interest rates at commercial banks constrain lending opportunities, while high returns on t-bills, credit opacity and default risk all reduce incentives to lend.

Now, it is within this context that we can discuss the fundamental conclusions of our research: strategy.

OBG believes that several specific strategic moves will best obviate the risk of losing any competitive edge, while maintaining economic growth and alleviating poverty. These five core elements include fiscal management, financial sophistication, infrastructure and education, diversification, and legislative reform.

While each of these strategies merit a lengthy discussion on their own, we don’t have time for that but I’d like to take a look at each one in turn and elucidate what is being done to further them.

Over the past decade, Ghana has made huge strides in improving management of public finances – indeed, it was one of the platforms the current government campaigned on. The issue is even more salient with the start of oil production. As Eurozone countries have ably demonstrated this year, a government’s fiscal health can dramatically impact its economic growth.

Accra has consistently stressed its commitment to bringing its balance sheet into line and addressing longstanding structural weaknesses. The operating deficit has fallen from 14% of GDP a few years ago to a target of 5% this year, roughly in line with attempts to meet the ECOWAS convergence criteria of a 4% ceiling.

Similarly, the payoff of arrears through cash and bonds has reduced drag on the expenditure side. Long-term campaigns to improve tax revenues and simplify public sector pay will ensure a far healthier future.

Improving financial sophistication and accessibility is also key for growth. Ghana benefits from a number of encouraging macro, political and social factors, but unless its population is able to tap into affordable credit facilities, it will fall short of its full potential.

With around 80% of the population unbanked, improving retail access to basic financial instruments is key. This includes developing rural banks and formalizing alternative distribution channels.

More importantly increased SME access to finance has the potential to unlock explosive growth. Commercial interest rates still often exceed 20%, but the Bank of Ghana has actively encouraged their decline, and has regularly lowered prime rates over the past two years.

Similarly, with three new credit bureaus and a collateral registry, transparency will improve dramatically, which will in turn lower risk premiums.

The third key strategy focuses on the development of infrastructure and education. In many ways, these two sectors are two sides of the same coin. They go together like banku and tilapia.

Ghana already has one of the strongest educational systems in the region, with compulsory school attendance and increasing enrollment in senior high schools. However, illiteracy and matriculation rates are an issue, and enrolment at the tertiary level is still lagging.

As a result, there have been a number of initiatives to improve access, ranging from capacity investments to reducing school shift systems to the Livelihood Empowerment Against Poverty, which incentivise parents to send their children to school. This momentum needs to be maintained and even accelerated.

Ghana also has a reasonably well developed infrastructure network, but there is still a lot that needs to be done. Less than half of the country’s roads are categorised as good and dedicated revenue streams do not fully cover maintenance. The hundreds of kilometers of planned roadworks are essential to spread prosperity, and new capital expenditure programmes for both rail and air facilities will aid this. Ghana will benefit from maintaining these measures at the highest level it can afford.

As we’ve already discussed, Ghana benefits from a sturdy industrial base and an expanding services segment. However, the current account is still heavily dependent on commodity exports, the three biggest of which are immensely volatile.

The government is of course addressing this with increased investments in sectors such as telecoms and IT or manufacturing.

But something that will have a more immediate effect is the diversification of trade and investment partners. The EU, which is still struggling with the debt crisis, represents almost one third of imports, and includes one of the biggest export markets – the Netherlands.

However, India, Malaysia, and Mongolia are moving increasingly high on the list of export destinations – and none too soon. Imports from Nigeria and Brazil have leapt significantly, as have investments from China and India – all this needs to be encouraged.

Finally, the country is working on reforms to reduce market inefficiencies and stimulate investment – an area where ever greater efforts will reap untold rewards.

Overall Ghana is making a concerted effort to listen to the needs of the private sector. The government has made clear its intent to reduce the size of its bureaucracy and streamline operations.

New laws are being introduced in a number of key areas – such as credit transparency and local contents – and capital is being funneled into needed areas, as evidenced by the Ministry of Trade and Industry’s five year plan.

Finally, increasing foreign investment remains a key component in future economic prosperity – not just for the capital it brings in but also the know-how.

Promotion and information are one part of this and we hope The Report: Ghana 2011, as a comprehensive, authentic and accurate review of the country’s economy – will play its own part in getting the message of Ghana’s potential across to a global audience.

Thank you for your time – and I hope you enjoy the rest of the evening.