A hike in United States of America (USA) interest rate last Thursday is expected to have far-reaching consequences on Ghana, which will further worsen an already bad economy, hike cost of living and push many more Ghanaians beyond the poverty line.
Capital inflows from foreign investors are expected to dry up, which will put serious pressure on the cedi to depreciate massively, and this will be compounded by falling commodity prices, especially crude oil prices, which have been projected to fall further in 2016 to as low as $20 per barrel.
The danger now is that tightening US policy may foist a credit crunch on emerging markets, including Ghana.
In addition, companies that have borrowed heavily in US dollars but earn incomes in cedis are particularly vulnerable to the prospect of a stronger dollar.
Commenting on the situation, Executive Director of economy policy think-tank, Institute for Fiscal Studies (IFS), Professor Newman Kwadwo Kusi did not mince words when he said Ghana has little room to manoeuvre, if any.
According to him, wages and salaries, interest cost and statutory payments constitute 82% of the 2016 budget.
Consequently, only 18% will be used for actual expenditure, including capital expenditure.
He stated that growth targets would be missed, which would undermine macroeconomic framework, and this would in turn affect fiscal framework.
According to him, while revenue would drop drastically, expenditure would increase significantly as it is election year.
Professor Kusi said with the US rate hike, it is much safer to invest in the US than in emerging markets such as Ghana, where indicators point to possible default.
As a result, he stated that dollar inflows from investment cash would drop significantly, creating a shortfall of dollars in Ghana.
He noted that as the cedi is linked to the dollar, this is likely to put pressure on the cedi to depreciate further.
According to him, as an import-dependent country that needs dollars mostly to finance imports, a decline in dollar supply would only worsen the plight of the cedi.
Foreign trade statistics
Professor Kusi stated that in foreign trade statistics, only about 18.5% of gold and oil exports revenues go into the government chest; the rest belongs to multinational companies that have invested in the sector, and as result not all the money come back to Ghana’s economy.
According to him, as a result of the rate hike, borrowing from the international market would be costly as foreign investors would demand higher interest rates.
He is of the view that government would be forced to borrow at throat-cutting rates to finance maturing debts as revenue will drop drastically yet the country cannot generate foreign exchange locally.
He explained that the US rate hike will compound Ghana’s already bad economic problems as crude oil prices are projected to fall further in 2016.
The Executive Director of IFS questioned why Finance Minister Seth Terkper used an IMF benchmark oil price of $52.5 per barrel in the 2016 budget when as of the time the budget was approved, crude oil prices were below $40 per barrel.
Incentive to dollar suppliers
Professor Kusi proposed to the Bank of Ghana to offer incentives to institutions and individuals who could bring in large quantities of dollars by offering them attractive interests above the market price of the dollar.
In his view, this could bring in the needed dollars to stabiles the cedi in the face of tightening US policy rates.
Professor Kusi added that if the economy was well managed, government could have sold the country’s debt to leading investment banks at attractive rates to raise dollars to avoid depreciation, in order to save the economy and later buy back the debt.
Questions about hedging
He questioned why government stopped the hedging policy in 2013 when Tullow Oil and Kosmos Energy have all hedged crude oil prices up to 2018.
He commended the Minister of Finance for deciding to hedge floating rates on Ghana debts.
Inflation to spike
Professor Kusi said the Bank of Ghana’s (BoG) policy of increasing base rates would only result in spiral inflation as Ghana is experiencing cost push inflation.
He said increasing base rates to arrest inflation is counter-productive since that has only increased inflation, explaining that the increase of the base rate from 13% in 2013 to 27% currently only pushed inflation up.
Election Year
The Executive Director of IFS noted that foreign investors are likely to withdraw their investments or not make additional investments which would affect inflows while government, on the other hand, is likely to embark on a spending spree.
He noted that the spending spree of government would lead to increase in liquidity, putting further pressure on demand for foreign exchange.
Debt servicing
The think-tank warned that if government continues to contract loans at prevailing high interest rates, interest payments on them could be equal to or outstrip the public sector wage bill.
A staggering GH¢10.5 billion budgeted for interest payments in 2016 is five times the allocation made in the budget for the ministries of Food and Agriculture, Trade and Industry, Roads and Highways, Water Resources, Works and Housing, Youth and Sports, and Transport.
This year’s GH¢9.6 billion for interest payment on Ghana’s loans was six times Ghana’s oil revenue.
According to IFS, the estimated interest payments in 2016 is equal to 28.8% of the projected domestic revenue in the year, 24.1% of total expenditure, and 57.1% more than the projected capital expenditure, “which is at the centre of economic growth and development.”
Impact on emerging market
Emerging market companies are being asked to pay more to service debts while sources of finance are dwindling.
Reinforcing these effects is evidence that the surge of capital that flowed into emerging markets over the past decade has started to reverse.
If the Federal Reserve’s tightening trajectory is sustained in 2016 — and its own forecast suggests that it should be — the impact on emerging market would be terrible.
One of these is the unwinding of a huge emerging market borrowing boom that was fuelled by US-inspired easy money.
Equity investors welcomed the move, sending stock prices higher in the US, Europe and Asia.
Even emerging markets, many of which have feared the fallout from a US rise, generally took the widely expected move in their stride.
Default imminent
Ghana and African countries that have borrowed heavily in dollars may be slipping back into the debt trap - and ultimately default - only a decade after a far-reaching round of debt forgiveness.
Some are looking to issue more Eurobonds to refinance existing foreign currency loans, but with US interest rate hike, the inevitably higher borrowing costs will do little to alleviate pressure on creaking state budgets.
Top of the list of 'at risk' countries, according to experts, is Ghana, the first African sovereign after South Africa to go to the international markets when it launched a debut $750 million Eurobond in 2007.
Since then, Ghana has issued two more bonds of $1 billion (£0.6 billion) each, helping push total public debt to 71% of gross domestic product (GDP).
This compares to 50% in 2005, the year anti-poverty campaigners Bono and Bob Geldof persuaded rich countries to write off billions of dollars owed by Ghana and other African nations.
When Ghana launched its debut bond in 2007 with an 8.5% interest rate, the cedi was virtually at parity with the dollar.
It is now around 4, meaning Ghana is in effect servicing a loan equivalent to $3 billion for the first $750m debt.
Ghana has agreed a $948 million, three-year rescue package with the International Monetary Fund in April, but even if the programme works, IMF admits the government's interest payments are likely to stabilise at an eye-watering 40% of revenues before the US interest rate hike.
And in reality, the IMF package - essentially a dollar loan with slightly more favourable interest rates - is merely papering over the cracks.
With growth slowing and a depressed outlook for commodity prices, balancing the books looks unlikely.
In Ghana, domestic yields are as high as 24%.
The cost of refinancing through more global bond issuance is also rising, as shown by the hefty 10.57% interest rate Ghana had to pay when it sold a $1 billion Eurobond recently.
If it comes down to default, restructuring is likely to be messier than in 2005 due to the presence of so many commercial investors in Africa's debt mix, as opposed to the bilateral lending that prevailed before then.
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