On the Road Again: Ghana, Kenya, and ZambiaOntheRoadAgain:Ghana,Kenya,andZambia

It was good to, once again, visit the countries where we invest, exchange views with local officials, and capture the qualitative aspects of our investment theses. We were a group of seven/eight investors, meeting with the usual suspects (government officials, private-sector representatives, officials of international organizations and local journalists) in Ghana, Kenya, and Zambia on March, 31 and April, 1. 

Contrary to many predictions, the pandemic hasn’t ravaged Africa. Vaccination rates are lower than in developed markets, but the vast majority of the population follow health precautions (masks, hand washing, social distancing, fist bumping). The number of COVID cases is low, roadside market activity is brisk, children are in school and shops are open. Traffic is intense, although not as chaotic as before the pandemic. Even in Nairobi! 

Nevertheless, activity has been affected and, in many countries, GDP still hasn’t recovered to pre-pandemic levels. We saw many new buildings in all three countries but, worryingly, only one crane was in operation. 

Ghana 

We visited Ghana to better understand the country’s fiscal outlook. Despite recent curbs to government spending, the picture that emerged was concerning. Most measures, such as cuts in ministers’ and top officials’ salaries, have not had a significant impact, nor will a ban on car imports by government ministries. Secondly, politically sensitive and non-discretionary expenditures, like wages for public-sector employees and interest payments, accounts for 53-55% of total expenditures. 

This leaves transfer payments and capital expenditure as the main expenses that the government can cut or delay. But cutting transfers at a time when the country is getting back on its feet after a pandemic could increase social discontent. Some transfers, like school vouchers, are statutory (i.e. linked to specific taxes) so not easy to cut, and lowering capex impacts growth. The recently-approved e-levy will not raise revenues by much. 

An IMF program would be one solution to rein in the deficit, but the government vehemently opposes this. Instead, it appears to be considering a US$2 billion syndicated loan. 

To date, Ghana’s budget deficit has mostly been financed by domestic investors. But bond yields have risen in recent months and a 2.50% increase in the Bank of Ghana (BoG)’s policy rate, to 17%, in March has made local financing even more onerous. Uncertainty also exists over the local market’s capacity to absorb more debt. Banks have been buying local bonds but this has created a “crowding out” problem that is affecting growth. Recent data from the BoG indicates that activity is stalling. 

The BoG impressed all of us with its commitment to its inflation target. Its monetary policy committee met earlier than scheduled in March, right after a 15.7% inflation reading for the 12 months to February was published. This reading implied that the bank’s real policy rate had turned negative for the first time in years, and prompted it to raise rates from 14.5% to 17%. Bank staff highlighted how rising commodity prices had triggered an increase in inflation and that they wanted to avoid second-round effects. To lower inflation, they said they were aiming to keep aggregate demand in check, hence the increase in the policy rate. 

One of us asked whether it would be helpful for the BoG to be lenient in its anti-inflation stance, to lower the government’s financing costs. But staff were vocal in rejecting this approach and said that their resolute stance could be an incentive for the government to act on the fiscal front. They also stated that a repetition of the monetary financing of government in 2020, to the tune of GHS10 billion or 1.5% of GDP, is not on the cards (my view: “Never say never”). 

The Ghanaian cedi’s depreciation is partly controlled by the BoG’s deployment of its foreign currency reserves, and BoG staff seemed comfortable with reserves at their current levels, of around US$9.5 billion. 

One third of imported fertilizers comes from Russia, and higher fertilizer prices will not only widen the current account deficit but also impact agricultural production. Nevertheless, Ghana’s current account is only expected to widen to 4.2% of GDP this year, compared to a previous forecast of 3.7%. 

Investment conclusion: This visit did not change our outlook for Ghana. At best, the country can muddle through 2022 because the government has no major foreign-currency redemptions coming up. But the fiscal outlook remains precarious, and it appears that the authorities will only negotiate an IMF program when they see no alternative. Until then, the Ghanaian government’s financial position will probably continue to deteriorate, especially given the current global environment. We see little scope for improvement so, even at current bond prices, our current underweight allocation to Ghanaian bonds is appropriate.