Political risks to watch in Ghana

2010-04-08 12:18

Accra - Ghana will join the club of oil-producing nations later this year, offering it the chance to transform its aid-dependent economy into an "African tiger".

Yet other countries have seen how the blessing of oil can turn into a curse, crowding out other sectors of the economy while triggering public spending sprees, official corruption and even fuelling insecurity.

Here are some of the factors investors are watching.

The oil windfall

A string of discoveries in the Jubilee offshore oilfield from 2007 mean Ghana has total reserves of at least 800 million barrels and potentially much more, with first oil due from the last quarter of 2010. Initial output is estimated at 120 000 barrels per day (bpd), rising to 150 000 bpd within months - squeezing Ghana into the list of the world's top 50 producers.

Aside from the state-owned Ghanaian National Petroleum Corporation (GNPC), major players in Jubilee include UK-listed Tullow Oil Plc , US-producer Anadarko Petroleum and privately-held US energy firm Kosmos.

The future of Kosmos' 30.875% stake in the West Cape Three Points block and an 18% share in the Deepwater Tano block is unclear after Ghana said a reported $4bn deal to sell them to US giant ExxonMobil would be illegal.

What to watch:

- Signs of a delay in the first oil. Ghanaian officials say preparations are on track for late 2010, but some analysts fear this is ambitious just three years after the first discoveries and say a 2011 start could be more realistic.

- Upgrades on reserves and production. Ghana has tended so far to be conservative: a March 24 finance ministry document based revenue projections on a 20-year output of just 500 million barrels. Tullow's website talks of Jubilee offering a likely 1.2 billion barrels', with potential for 1.8 billion.

- Ownership wrangles. Ghana's surprise move last October to declare any Kosmos-ExxonMobil deal illegal sent shockwaves through the oil industry and raised concerns of state meddling in private sector deals. The announcement that Ghana itself was interested in the stake added to fears and raised questions over how it would fund such a purchase. China and South Korea have been cited as potential partners.

The economy

Oil is an unpredictable, potentially game-changing new factor for the economy. President John Atta Mills' government hopes the new revenue stream can help lift Ghana out of the low-income bracket of countries such as Afghanistan and Haiti into the middle-income ranks of Iran or Egypt - a goal the International Monetary Fund says it can attain in a decade.

Economic growth next year is forecast to be among the highest in the world at close to 15%, while analysts see the Ghanaian cedi building on its 2009 gains against the dollar and other currencies.

The cedi appreciation has helped bring inflation from 20% in early 2009 down to around 14% now, paving the way for the first interest rate cut in three years last November and a second one in February.

The Bank of Ghana has said it is working on measures to avoid the so-called "Dutch disease" - in which a rise in the exchange rate prompted by a surge in exports from one sector damages the export performance of others.

Firm commodities prices are expected to provide an extra cushion to the economy and Ghana is determined that the oil rush will not be to the detriment of its gold and cocoa sectors. The latter could even supplant Ivory Coast's ailing crop as the world's biggest in around 2012.

What to watch:

- Rate cuts. After the bigger-than-expected 200-basis-point cut in the prime rate to 16 percent in February, most analysts expect more modest moves in coming months, but some are still betting on at least two more 100-basis-point moves downwards.

- Inflation takes off again. The central bank is forecasting consumer price growth dropping to under 10 percent by the end of the year. But there are fears the oil money, the public spending plans and any rate cuts could reverse the downward trend.

- A planned re-basing of the economy due around mid-2010. A move to include parts of the informal economy in official output figures, it will mean a statistical upgrade of the size of the economy by at least a quarter, according to the IMF. That will in turn lead to a statistical re-adjustment of official debt, deficit and other core figures.

Public finances

Mills' government unsettled markets in August by announcing that debt arrears inherited from the former government meant the end-2008 public deficit stood at 24.2% of gross domestic product, almost double the previous estimate. Emergency measures brought the deficit back down below 10% by the end of the year, and the government is banking on oil revenues helping it fall to 3-5% by 2012.

The IMF has applauded that target but notes the deficit would have been around four percentage points larger had it not been for domestic spending arrears.

For 2010 the government promises to use spending in the energy sector, farming and infrastructure to prime growth. While this should underpin growth, the IMF's recommendation after its March visit to the country was clear: "Fiscal management remains Ghana's main challenge".

What to watch:

- Higher public borrowing. The new spending plans have led to concerns the deficit could start ticking up again. Ghana's public sector wage bill - at around 11% of GDP one of Africa's highest - narrows the scope for any belt-tightening.

- Ghana goes to the market for new funds. Ghana already has a Eurobond and was set launch a new $300m issue before poor market conditions prompted it last September to hold back. Solid take-up for Senegal's Eurobond in December suggests demand for frontier economy debt is there.