Investment trip to Ghana: A lot has improved but the cost has been high

Accra, Ghana

By Cavan Osborne, Portfolio Manager, Old Mutual Equities

On mentioning that we arrived from Nigeria, the first thing most Ghanaians mentioned was that Ghana’s jollof was better than Nigeria’s jollof. This is a local reddish coloured rice dish, and clearly a very passionate subject. Admittedly, we didn’t try Nigerian jollof on this trip but certainly Ghana’s was good.

After just 30 minutes in Ghana’s capital Accra, it seemed that it was more than just the food to be positive about.

Our strategy has avoided investing in Ghana for a few years now. In fact it’s been four years since our team’s last trip to the country.

– The local stock exchange, while well populated with around 40 counters, trades less than US$1 million per day.
– The banking sector was a mess.
– The cedi, Ghana’s currency, has been the most consistent depreciator in our universe – losing 8% against USD per annum over the last 15 years.
– The country has a bad habit of over borrowing, leading to a horrid current account and large fiscal deficits

However, the situation has been improving. There is a very noticeable upgrade in the capital city that shows where at least some of the borrowings have gone. Accra has a smart new airport (we were through passport control in 10 minutes!), many of our meetings were held in shiny new buildings, many more roads are free of pot holes – with some even having sidewalks, and the city is visibly cleaner.

Lagos on the other hand was very much the opposite; I struggled to see much improvement in the last seven years. And now that Ghana seems to have addressed the electricity situation (well mostly), it is literally a breath of fresh air when compared to diesel fumes bellowing from all the power generators around Lagos. The area around the airport reminded me of Sandton in Johannesburg. High rise buildings, shopping centres, top-end restaurants and luxury cars.

Ghana’s economy has been boosted by the doubling of offshore oil production and of course the government’s willingness to spend. The country’s latest IMF GDP forecast for this year is at nearly 6% – one of the highest on the continent.

However, this liberal spending and seemingly poor financial management over the last few years has damaged the country.

Interest rates are still too high to attract potential investment yet, in turn, have been one of the factors that has caused bad debt in banks. The other reason cited was the lending by banks to related parties and connected people, in particular to what are known as the BDCs – these Bulk Distribution Companies were set up to import oil into the country. The volumes picked up hugely during the time when the hydro power couldn’t meet demand and Ghana turned to more expensive oil as an alternative. The government failed to meet all the payments to the oil supply chain that including the BDCs, resulting in BDCs not always being able to repay their bank loans. The banking sector for much of 2017 and 2018 reported that in excess of 20% of its loans were non-performing. This spiralled and lead to a number of major restructurings in the banking sector, where seven banks have been closed and other banks have been forced to recapitalise. The banks we met with while in the country seemed comfortable that the banking sector is now stable.

Out of the 16 banks that met the new capital requirements, only two are Ghanaian. Interestingly six of the 16 are Nigerian.

So a lot has improved in the country but the cost has been high.

On the surface, the government’s forecast for the 2019 fiscal deficit revised to 4.2% of GDP looks encouraging. But, looking at the raw numbers, we remain concerned. From the GHS 59 billion revenue (approx. US$11 billion) government expects in 2019, around 30% will be used to pay interest on the debt (US$3.4 billion). This means the government is going to be caught having to keep on issuing debt, just to meet its interest payments.

Ghanaians have a special term for the erratic electricity supply over the last decade. Dumsor is translated from the local Akan language to ‘on-off’. Ghanaians have had to endure long periods with the lights off. It seems that at this time Ghana is going through an ON period. Despite this, with reserves at just two months of the value of imports, the currency is likely to keep depreciating. Even though there is a lot for Ghana to be proud of, its eagerness to borrow and low reserves mean that Nigeria is probably going to be a safer investment.

This trip note was originally published by Old Mutual Investment Group.