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Monday, September 7, 2009

Oil Production No Panacea To Growth

By all accounts, the Ghanaian economy is still reeling from the impact of last year’s food and fuel price shocks, that saw a range of subsidies on food, fuel and utilities either reinstated or increased.

Last week, with the presentation of a supplementary budget of GH¢ 253 million ($175 million) before Parliament, the authorities surprised markets with the admission that the budget deficit they inherited from the NPP government at the end of 2008, previously estimated in the region of negative 14.5 per cent of GDP, had in fact ballooned to negative 24.2 per cent of GDP.

While the extent of debt arrears had long been in question, the revised budget estimates for 2008 exceeded even the most bearish of analyst forecasts. What are the likely market implications?

First, it is important to note that despite the shock value of the news, it is essentially old news. A number of one-off events contributed to the deficit that are unlikely to recur in the near future – the external shocks that impacted the economy most notably the spike in imported oil, and costs associated with the hosting of CAN 08 and Ghana’s Golden Jubilee celebrations exerted an influence on spending even late in 2008.

Second, newly-identified arrears aside (and the supplementary budget is aimed at dealing with that), whatever borrowing was needed to sustain a deficit of this magnitude has largely been absorbed by the market. To provide more clarity on this, we outline the data on net debt issuance in Ghana below.

Third, the authorities’ intention to persist with the effort to narrow the deficit further, to high single digits by the end of 2009 is commendable.

While we have our doubts about whether this will be achieved (we note that the primary deficit figure provided for the first half performance, the much-improved negative 4.5 per cent does not take into account full debt service costs), the intention to proceed cautiously with spending is at least welcome.

Finally, the influence of the IFIs is also important. The World Bank has already approved $300 million of budget support for Ghana, and the recently-announced IMF package of $1.1 billion has at least reinforced investor belief that the worst of the balance-of-payments crunch may now be behind Ghana. All is not rosy.

Stresses remain in place, most notably the substantial arrears of the oil sector owed to Ghanaian banks. But Ghana, with its long history of difficulties related to oil imports, has at least got experience in working out issues of this nature.

The oil-related debts owed to one of the large state-owned banks are to be restructured, to create more fiscal space. This has been done successfully in the past, with the issuance of longer-dated inflation-linked debt in 2001.

The game-changer this time around is that Ghana itself is set to emerge as an oil producer by 2011. Eventual oil production is, of course, no panacea, and will not resolve the near-term challenges faced by the economy, with short-term interest rates likely to remain elevated.

But it does allow for the issuance of more longer-dated debt, relaxing the economy’s near term financing constraint.

Article : Razia Khan

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