African Lions: Is Ghana A Bellwether?

BMI View: Ghana's current economic malaise could be replicated in other 'African Lions' over the coming months and years. We will be watching out for a number of red flags for growth: surging imports, deterioration of the government budget and negative shifts in local sentiment. At present, Mozambique, Tanzania and Zambia are most at risk of economic instability.

Ghana provides a stark example of the challenges that can befall relatively small economies when there is a surge in foreign investment coupled with a consumer boom and inadequate policy monitoring. Since 2011, a 'perfect storm' has been brewing, involving a sharp widening of the current account deficit and fiscal deficit, rising debt levels and severe currency depreciation (see 'Will Ghana Seek External Assistance?', April 22). Other countries could follow suit over the coming years, albeit with slightly different dynamics.

Although our core scenario is for all of our ten 'African Lions' (top ten growth markets) to post economic growth in excess of 6.0% annually on average over the coming ten years, it will not be plain sailing for these economies. Rather, we anticipate a bumpy ride, characterised in some cases by severe structural macroeconomic imbalances, high inflation and currency depreciation.

Strong Headline Growth Belies Structural Weaknesses
Africa - Real GDP Growth Forecasts, % And Percentage Point Contribution of Components, 2014-2023 annual averages

BMI View: Ghana's current economic malaise could be replicated in other 'African Lions' over the coming months and years. We will be watching out for a number of red flags for growth: surging imports, deterioration of the government budget and negative shifts in local sentiment. At present, Mozambique, Tanzania and Zambia are most at risk of economic instability.

Ghana provides a stark example of the challenges that can befall relatively small economies when there is a surge in foreign investment coupled with a consumer boom and inadequate policy monitoring. Since 2011, a 'perfect storm' has been brewing, involving a sharp widening of the current account deficit and fiscal deficit, rising debt levels and severe currency depreciation (see 'Will Ghana Seek External Assistance?', April 22). Other countries could follow suit over the coming years, albeit with slightly different dynamics.

Strong Headline Growth Belies Structural Weaknesses
Africa - Real GDP Growth Forecasts, % And Percentage Point Contribution of Components, 2014-2023 annual averages

Although our core scenario is for all of our ten 'African Lions' (top ten growth markets) to post economic growth in excess of 6.0% annually on average over the coming ten years, it will not be plain sailing for these economies. Rather, we anticipate a bumpy ride, characterised in some cases by severe structural macroeconomic imbalances, high inflation and currency depreciation.

Here, we highlight some of the indicators that we will be monitoring, in order to identify economies that are most at risk of instability.

Surging Imports

In Ghana's case, the initial pressure on the cedi stemmed from a sharp rise in imports over 2010-2011, due to an influx of capital and consumer goods. Although exports were also rising as oil came on stream, imports outpaced exports and the trade deficit widened.

Currency Weakness Triggered By Rising Imports
Ghana - Imports, USDmn (LHS) and Exchange Rate, GHS/USD (RHS)

We will be watching out for countries that experience rapidly-rising imports that are not matched by a concurrent rise in exports. Weak foreign investment inflows would intensify the pressure on the balance of payments, resulting in diminishing reserves and currency weakness.

Mozambique and Tanzania are in the danger zone in this area. Capital imports have swelled due to high demand in the burgeoning natural gas industries. We forecast that the countries' current account deficits will equal 39.9% and 16.4% of GDP, respectively, in 2014. Financial inflows have been strong thus far, keeping the balance of payments and currencies under control. However, a shift in investor sentiment or a simple fluctuation in foreign direct investment could disrupt the delicate balance. In Tanzania's case, the risk is accentuated because gold export revenues have been diminished by lower gold prices.

African Lions - Current Account Balance, % of GDP
Country 2012e 2013e 2014f 2015f 2016f 2017f 2018f
Angola 8.2 6.8 6.0 4.4 2.7 1.0 -0.3
Cote dIvoire -2.9 -3.9 -2.0 -3.7 -5.2 -6.1 -6.5
Ethiopia -7.2 -7.8 -7.4 -7.1 -6.6 -5.9 -4.9
Ghana -12.5 -14.5 -11.4 -11.3 -12.2 -9.8 -9.7
Kenya -9.8 -8.7 -7.7 -7.2 -6.8 -6.1 -5.4
Mozambique -36.5 -41.1 -39.9 -37.6 -34.3 -32.6 -26.6
Nigeria 4.6 4.1 4.2 3.6 2.5 2.3 1.4
Tanzania -11.8 -13.9 -16.4 -16.4 -16.4 -16.3 -16.2
Uganda -8.0 -7.6 -7.5 -7.9 -8.4 -7.9 -6.6
Zambia 3.8 1.7 1.2 1.4 0.5 0.6 2.4
National Sources/BMI. f = BMI forecast

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Budget Deterioration

Returning to the case of Ghana, the sudden increase in the budget deficit in 2012 is a key part of the equation. The fiscal deficit rose to 11.5% of GDP from 4.1% in 2011 and it has since stayed close to this elevated level. This has resulted in a rising government debt pile, most of which is financed at very high interest rates (+20%).

Budgets In Deficit Across The Board
Africa - Budget Balance, % of GDP, 2014f and 2011

We will be closely monitoring the fiscal positions of the African Lions, bearing in mind that a budget deficit is not necessarily a cause for concern. We will take a positive view on fiscal policy geared towards development spending, the removal of subsidies, improving the tax take and maintaining debt sustainability. On the other hand, budgets focused on recurrent spending and excessive public sector pay will generally be viewed negatively. Sudden, unexpected changes in tax rates for consumers or businesses will be further red flags.

In this regard, Mozambique is once more on our radar. The government has been ramping up spending: we forecast a budget deficit equal to 10.3% of GDP in 2014, up from an estimated 4.8% in 2013. Although the spending is being focused on growth-enhancing investment, transparency over the expenditure is lacking and there is a risk that it will spiral alongside the debt pile. Zambia and Kenya have also seen a deterioration of their budget positions over recent quarters, but in both cases the deficits are being managed more prudently, in our view.

Local Confidence Weakening

A deterioration in local sentiment played an important part in the depreciation of the Ghanaian cedi. As the economic fundamentals weakened in the current account and budget, dollarisation in the local economy rose. Local participants were concerned about the trajectory of the cedi and reduced their exposure, leading to a vicious cycle.

Kwacha Under Pressure
Zambia - Exchange Rate, ZMW/USD

Zambia is currently undergoing a negative shift in sentiment. The sharp sell-off of the kwacha in March 2014 coincided with signs of weakness in the Chinese economy and a drop in copper prices - indicating growing concern over Zambia's exposure to the Chinese slowdown via its copper exports. Importantly, the depreciation was driven by domestic sentiment in the corporate sector, as opposed to a drop in copper receipts. The kwacha looks precarious from a technical perspective and we expect further depreciation, which poses upside risks to inflation and interest rates. We also hold a bearish stance on the USD 2022 eurobond, expecting yields to rise as weak sentiment infiltrates the offshore market.

As regards the other African Lions, we will be tracking a number of indicators in order to detect shifts in local sentiment in addition to anecdotal evidence gathered from our contacts in the region. T-bill yields, money market rates and interbank interest rates are all illustrative of domestic perceptions of risk. Moreover, the data are available at high-frequency.

Political Instability

Ghana's relatively stable political climate has helped to mitigate the economic crisis. Even though the budgetary pressures in 2013 resulted in painful cuts to subsidies and hikes in utility prices, protests were limited, enabling the government to push through with its policies.

Potential For Protests
African Lions - Heatmap of BMI's Short-Term Political Risk Ratings

We are mindful that not all countries benefit from such political stability, meaning that sudden changes in economic policy may trigger unrest, potentially forcing the government to backtrack, resulting in a worsening of the economic crisis. As shown on the accompanying map, our proprietary political risk ratings indicate that there is relatively high risk of instability in Ethiopia, Nigeria and Uganda. Our ratings are updated on a monthly basis and comprise components relating to the policy-making process and social stability, among other things. Nigeria is a particular risk hotspot at present given the deep dissatisfaction with the government's handling of an ongoing kidnapping crisis.

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This article is tagged to:
Sector: Country Risk
Geography: Africa, Angola, Cote d`Ivoire, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda, Zambia
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