The outlook for Ghana seemed bright in the late 2000s. The country had recently won debt relief from Western creditors; the economy was humming at a growth rate of more than 8 percent; large oil and gas deposits had just been confirmed offshore; and the country was lauded as a model of democracy, good governance and stability in Africa. So it seemed reasonable to borrow against projected oil revenue to finance big infrastructure projects and speed up the pace of development. It proved to be anything but.
Today, Ghana is reeling from a series of policy mistakes and market setbacks. Those oil fields have failed to produce as much as expected, while sharp falls in the price of crude — as well as those of cocoa and gold, the country’s two other big exports — and chronic power shortages have hammered the economy. Heavy borrowing and generous public sector pay hikes have left the government overstretched and caused the cedi to drop by 25 percent against the dollar this year as of August 23. The Finance Ministry projects growth of just 3.5 percent for 2015, down from 14 percent in 2011, while inflation is running at nearly 18 percent. In April the government of President John Mahama agreed to a $918 million bailout program from the International Monetary Fund, the country’s second in six years.
The program calls for a mix of spending cuts and tax increases to reduce the government’s deficit to 3.5 percent of gross domestic product in 2017, down from 9.5 percent last year. It also requires administrative and legal reforms designed to make sure the country avoids budgetary blowouts in the future. On June 30 the IMF declared Ghana mostly on track to meet its targets, but an IMF program is no guarantee of success. “The next few years are make-or-break,” says Kevin Daly, a senior investment manager for emerging-markets debt at Aberdeen Asset Management in London.
Ghana’s fall from economic boom to bailout is a cautionary tale for much of sub-Saharan Africa. The region has witnessed an influx of capital in recent years as investors have sought higher returns and a play on the continent’s resource wealth and fast-growing consumer class, but commodity price weakness and a newfound risk aversion toward emerging markets threatens an exodus. After Ghana became the first sub-Saharan African state after South Africa to tap the Eurobond market, in 2007, several other countries followed, including Gabon, Rwanda and Senegal, leaving them vulnerable if investors head for the exits. Sub-Saharan African nations raised a record $16 billion on the Eurobond market in 2014, but issuance has fallen dramatically this year as yields have climbed. Zambia, which faces a yawning budget deficit because of plunging copper prices, had to pay 9.375 percent — the highest rate ever for a borrower in the region —to sell $1.25 billion worth of Eurobonds in July.
Yet many of the strengths that led investors to Ghana remain in place, including the state’s democratic stability and openness to foreign investment.
“There really is a clear separation between the political environment and the commercial,” says Doug Lacey, a partner in LeapFrog Investments, a Mauritius-based private equity investor in insurance companies across Africa and Asia that owns a stake in Ghanaian pension trustee Petra Trust. Roy Adkins, a London-based African-debt analyst for U.S. investment manager T. Rowe Price Group, agrees: “If they can right themselves, they would very well be poised to reestablish themselves as one of the leading economies on the continent.”
Ghana was one of the first African countries to win independence in the postcolonial era, breaking free from the U.K. in 1957. After a series of coups in the 1960s and ’70s, flight lieutenant Jerry Rawlings seized power in 1981 and headed a military government for 12 years, implementing a number of reforms recommended by the IMF and other development agencies to increase private investment in the economy and reduce public control. The government invited mining companies to take over and revitalize state gold mines, for example, and it adopted a low-tax regime to encourage investment. “Ghana was the donors’ darling for a long time, and they were reforming a lot of things the donors wanted them to,” Adkins says. Largely as a result, the country ranks as one of the region’s best performers in a variety of surveys, such as the World Bank’s Doing Business ranking of regulatory climates (fourth in sub-Saharan Africa, 70th globally) and the Resource Governance Index, which rates countries for transparency and management of natural resources.
In 1992, Ghana adopted a new constitution and legalized political parties; Rawlings proceeded to win two four-year terms as president. Elections have been deemed free and fair since then, and the country’s political stability has attracted funds from development agencies and foreign investors. According to World Bank data, per capita GDP soared from $264 in 2000 to a peak of $1,875 in 2013 but fell back to $1,476 in 2014 as the current crisis hit.
The discovery of oil and gas off Ghana’s coast in 2007 promised to accelerate development. That year the country issued its first Eurobond — a $531 million, ten-year deal — to help finance new infrastructure projects. The first big one was a $1 billion processing plant to take gas from the offshore Jubilee field and prepare it for use in power plants, generating cheap electricity and displacing costly crude oil imports.
The flow of gas has been slower than expected, though, and construction delays meant the plant didn’t come onstream until late 2014, two years later than scheduled. Ghana’s oil import bill actually rose, to $3.7 billion in 2014 from $2.9 billion in 2012, and state-owned power plants were running at less than 50 percent of capacity. Low rainfall has compounded the power shortage, causing a drop in output from Ghana’s main power plant, a hydropower facility on the Volta River. Consumers and businesses face rolling blackouts, typically lasting 12 hours, every 36 hours. According to the World Bank, the country spends 1.9 percent of GDP on generators and the cost of lost electricity sales amounts to 3.9 percent of GDP.
In his July update to Parliament, Finance Minister Seth Terkper said nine new power plants at various stages of planning and construction would nearly double the country’s generation capacity, to some 1,800 megawatts. It’s not clear whether all of these plants will be built, but investors welcome the government’s openness to private capital. “We like that they have worked diligently to negotiate balanced power purchase agreements and have clear requirements to support key projects,” says Justin DeAngelis, a senior member of the power deal team at Denham Capital, a Boston-based private equity firm that owns Endeavor Energy, a developer of African power projects.
Yet in Ghana, as in Africa, producing electricity is no guarantee that consumers can use it. Delivering power requires transmission and distribution networks, and billing and maintenance capacities. And for investors in African utilities, the ability of state-owned distribution companies to pay for the power they take is a major risk. Under Power Africa, an Obama administration program that seeks to foster investment in the continent’s electricity sector, U.S. government development agency Millennium Challenge Corp. has committed as much as $498 million to modernizing Ghana’s two state-owned distribution companies and shoring up their balance sheets.
Gas from Jubilee would not have solved all these problems, but Ghana’s decision to finance the processing plant with a loan from the China Development Bank appears to have added to its problems. Negotiations with CDB took longer than expected, delaying loan disbursements and the completion of the project. As part of the loan, moreover, CDB takes 13,000 barrels a day of Ghana’s oil production, or 13 percent of the current total. The terms of CDB loans often aren’t as clear as those of other development financing, says Brett Rowley, emerging-markets strategist at TCW Group in Los Angeles. “The governments are looking at this as concessional financing, but I’m not sure they understand what’s expected of them,” he adds.
With the windfall from the Jubilee field failing to arrive as expected, the Ghanaian government has struggled to pay rising wages for public workers, a consequence of one of its earliest and biggest policy mistakes. In the 2008 presidential election campaign, opposition candidate John Atta Mills pledged a series of salary raises for civil servants. The promise helped him win election, but at a steep cost. Wages ate up 72.5 percent of tax revenue in 2013, according to Finance Ministry statistics, crowding out much of the government’s planned development spending. Public sector jobs now pay more than those outside government, according to the World Bank, impeding the private sector growth Ghana hoped to stimulate.
“The wage increases were the killer blow,” says Aberdeen’s Daly. “Ultimately, they punished the broader population.” This experience is not unique to Ghana, adds TCW’s Rowley. “The opposition party criticized the government for overspending in an election year, then came into power and did the exact same thing,” he notes. “That’s a risk we see in several democracies in Africa.”
The lack of fiscal discipline led donors to cut back. Aid grants fell to 1.1 percent of GDP from 2011–’14, down from 2.8 percent during the preceding four years, according to the IMF.
With problems compounding, the government stepped up borrowing and tapped the reserves of the central bank, the Bank of Ghana, to fund daily expenses. Government debt is expected to hit 67.5 percent of GDP this year, up from 38.7 percent in 2011; debt service costs are set to jump to $1.2 billion in 2017, when the country’s first Eurobond matures, from an average of $383 million a year from 2012 to 2014.
Ghana plans another Eurobond offering, of as much as $1.5 billion, this year and will use the proceeds in part to retire high-cost, short-term domestic debt, according to Finance Minister Terkper’s midyear update. The offering would push Ghana’s dollar-denominated debt load past $4 billion — almost triple the total oil revenue of $1.5 billion the country has generated since crude began flowing in December 2010, according to the Natural Resources Governance Institute, a George Soros–funded advocacy group that publishes the Resource Governance Index.
As part of its imf bailout program, the government has committed to raise taxes by 2 percent of GDP and cut spending, mainly on salaries. It managed to trim its wage bill to 53 percent of tax revenue last year by adopting a hiring freeze and cutting down on so-called ghost workers — people who draw salaries but do no work. Ghana has pledged to eliminate consumer fuel subsidies by September. These and other measures are designed to reduce the deficit to 3.7 percent of GDP in 2017 from 9.4 percent last year and bring debt down to 61.1 percent of GDP. The IMF program also requires the government to stop drawing on central bank reserves as of next year.
Some foreign investors can expect less favorable treatment as a result of the program. The IMF has recommended that the government cut back on exemptions, tax holidays and tax-free zones that currently amount to some 6 percent of GDP.
Reading through Ghana’s to-do list under the IMF program makes clear that even in one of Africa’s most stable, democratic and well-governed states, there is plenty of room for improvement. One of the key concerns, particularly as the country gears up for next year’s presidential election, is whether Ghana can break the pattern of blowout spending in an electoral year. This is a chance to prove that the government has learned from past mistakes. TCW’s Rowley sees some encouraging signs of change in Ghana’s approach to issuing debt. In years past, the government would accept virtually any and all tenders at its debt auctions, exceeding its fundraising targets even if it meant accepting tenders at excessive yields. This year the Treasury has been more disciplined. “The biggest improvement I’ve seen is on the debt management side,” Rowley says.
With new oil and gas fields set to come onstream in the next few years, a combination of greater discipline and more revenue could strengthen the finances of the government and allow it to start reviving some of its infrastructure projects, especially in the power sector. But although several new fields look promising — one holds enough gas to solve the country’s electricity shortage on its own — Ghana’s experience argues against taking anything for granted.
“The government was focused on the bright medium-term prospects and blind to the short term,” says Rowley. “One thing investors feel better about now is that they are focused on the here and now. The medium term is made up of many short terms.” •
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