Following Ghana’s release of first-quarter fiscal numbers on June 3 that showed the government missed the budget deficit target, it drew the attention of investors as to whether it represented potential threat to inflation or currency stability.
Ghana recorded a budget deficit of 1.6% of gross domestic product in the first three months of the year against a target of 1.4% of GDP. The wider gap was primarily due to the government's inability to collect 9.7% of the revenue target for the period. The budget shortfall would have been much wider but for the authorities also cutting expenditures by 9.6%.
Clearly the slight overrun suggests there's not much threat to inflation and currency stability. Beyond the fiscals, we observe that fuel prices and utility tariffs are poised to trend downwards, thus anchoring inflation for the rest of the year.
Ghana’s inflation accelerated for a third month to 9.5% in April from 9% in January. The reading was in line with our forecast earlier this year that consumer price growth will quicken but remain below 10% in the first half. Apart from currency risks and any significant fallout from the budget in coming months, we think inflation in Ghana will once again close the year in single digit.
With the outlook on consumer price growth subdued, we think there’s potential for another interest rate cut this year from the Bank of Ghana, however, due to currency risks and the fact that the central bank should keep interest rates attractive, the cut won’t be aggressive.
The cedi lost 10.8% in the first quarter but gained 1.3% in the subsequent two months. The trend on the larger part shows that the depreciation that was sparked by the central bank’s surprise 100 basis point rate cut in January, is beginning to dissipate, more than indicates that the currency gained ground against the U.S. dollar.
Given the developments, we want to note that the central bank took the right decision later on by leaving the rate unchanged at 16% when it met on April 1 and May 27. A cut would have been a wrong decision while an increase would have been too aggressive on the inflation outlook.
Moving forward, we think that any significant pressure on the cedi is kept at bay by the monetary policy stance, the government’s willingness to align spending with revenue and a favourable international gross reserves position of $9.3 billion, equivalent to cover 4.7 months of imports.
In addition to a relatively stable currency, the outlook on fuel prices and utility tariffs is dampening inflationary expectations. Information from the Public Utilities Regulatory Commission indicates tariffs will remain unchanged in June and they may be reduced from July due to some thermal plants switching to use cheaper natural gas from the more costly heavy fuel oil, and the price of natural gas likely to come down, from ongoing negotiations between government and natural gas producers.
Also, crude prices are forecast to continue falling in coming months on lengthening and protraction of the infamous international trade war. The impact of the trade war is being felt in slowing down of global economies, which means lower demand for crude. The Organization of Petroleum Exporting Countries (OPEC) and its friends is not able to help prices in the circumstances as it keeps postponing a meeting to review production cuts.
Brent futures for December 19 delivery have dropped to $60.9 per barrel from $66.1 per barrel at the end of March. Products for August 19 delivery also eased to $63.3 per barrel from $67 per barrel over the period.
Away from China, U.S. President Donald Trump last two weeks announced tariffs on all imports from Mexico. A meeting by OPEC and its friends initially set for April to review production cut agreement has now been pushed to June 25 and even that does not look certain because Russia, which barely met production-cut targets in the last four months continues to push meetings dates.
With lower crude prices, the Ghanaian economy is expected to gain a lot, being a net importer.
In summary, we applaud the government for making effort to stay the fiscal course as it promised. We note that the drastic personnel changes at the Ghana Revenue Authority announced on June 2 were intended to help the agency to meet its revenue targets, which when attained will go far to improve the economic conditions.
With the direction of the key drivers of inflation, we conclude by inclining with the central bank that inflation may drift towards the midpoint of the target band of 6%-10% by the end of the year. In addition, given the inflationary outlook, another rate cut, albeit nonaggressive, may happen in the next few months.