Ghana – seen by many investors as the economic gateway to West Africa and one of the region’s most stable democracies – is jeopardising its access to international capital markets due to its high level of public indebtedness and limited tax base.
The country – with 32 million inhabitants and a $82bn (506.37bn cedis) economy – has managed to attract a wide range of foreign investors during the past five years but has now run into a set of economic and political problems, partly down to the Covid-19 pandemic. The International Monetary Fund (IMF) estimates that the country’s economy expanded by only 0.4% in 2020 but rebounded by 4.7% during 2021. It forecasts it will jump by 6.1% in 2022. Economic growth averaged 5.2% a year between 2015 and 2019. Income per head is now $2,556 a year, up from $1,784 in 2015.
Ghana – a former British colony known as ‘the Gold Coast’ from 1821 until its independence in 1957 – attracted $2.65bn in foreign direct investment (FDI) inflows in 2020, the highest amount in West Africa, down from $3.88bn in 2019 and $2.98bn in 2018, according to the World Bank. The country’s annual FDI inflows averaged $3.22bn between 2011 and 2018. During the first six months of 2021, it secured $829.29m in FDI inflows, including 63 projects in the services sector valued at $597.63m and 24 projects in the manufacturing sector valued at $98.74m, according to the Ghana Investment Promotion Centre (GIPC), the country’s investment promotion agency. The general trading and building and construction sectors attracted $41.87m and $22.63m, respectively.
For the first half of 2021, the country’s biggest investment partners were Singapore ($307.50m), Australia ($204m), India ($61.57m) and the Netherlands ($46.80m). The US and China also made sizeable investments. The GIPC set the overall target of securing $3bn in inward FDI during 2021, but it is not yet clear whether that goal was met.
The Ghanaian government had something of a coup when the African Continental Free Trade Area (AfCFTA) opened its secretariat in Accra, the Ghanaian capital with a population of 4.2 million, in August 2020. The AfCFTA is the world’s biggest free trade area measured by the number of participating countries (54) and went live on 1 January 2021. In 2019, Google opened its first AI centre in Africa in Accra, while in April 2021, Twitter set up its first African office in the capital, too.
“The AfCFTA has the potential to be a game changer, not only for doing business across the continent but also for how the rest of the world thinks of Africa,” said Stephanie Sullivan, the US ambassador to Ghana, in a speech in December 2021. “It can truly make Ghana a gateway for the African market.”
Ghana's pull for foreign investors
In 2020, German automobile major Volkswagen expanded its footprint in sub-Saharan Africa with the opening of a vehicle assembly facility in Accra, making Ghana its fifth vehicle assembly location in the region (after South Africa, Kenya, Nigeria and Rwanda). In June 2021, Toyota opened a vehicle assembly plant in the city of Tema, close to Accra. Nissan, Sinotruck and Katanka are other vehicle brands that are locating vehicle assembly plants in the country. In April 2021, South Korean carmakers Hyundai and KIA also announced plans to establish assembly plants there by the end of 2022.
The oil and gas industry has become one of the main engines of the country's economic growth and a magnet for foreign investors since the first significant deepwater discovery of oil and gas off Ghana's coast in 2007. These include oil and gas giants such as Tullow Oil from the UK, Kosmos Energy from the US and Eni from Italy. The country has three major offshore oil and gas fields: Jubilee, Tweneboa Enyenra Ntomme and Sankofa.
In 2014, the country's government said it expected about $20bn to be invested in the industry over the coming five years, although it is not clear if all that investment has materialised. In November 2021, the country was producing about 150,000 barrels of oil a day, down from 195,000 barrels in 2019, mostly due to Covid-19 restrictions.
Meridian Port Services – a joint venture between Bolloré Africa Logistics of France, APM Terminals of the Netherlands and the Ghana Ports and Harbours Authority – pledged to invest up to $1.5bn in 2017 to quadruple the container capacity at the port of Tema to 3.7 million TEUs (twenty-foot equivalent units) a year. The country's busiest port would like to become a hub for West Africa.
However, during the past two years, Ghana has been beset by economic and political problems, putting at risk its reputation as foreign investors' West Africa darling. Major oil and gas producers have started to ditch their projects in the country, mainly because they have adopted new environmental, social and governance agendas in the wake of the developed world's net-zero goals and are afraid that any future investments in oil and gas projects could become 'stranded' assets.
In May 2021, ExxonMobil, the US oil giant, exited the country’s upstream petroleum sector where it has been conducting exploration after acquiring rights in 2018. In the first quarter of 2020, Norwegian oil company Aker Energy said it was indefinitely postponing its final investment decision on the Pecan offshore development project in the Deepwater Tano Cape Three Points block. Eni is also fighting a government directive issued in April 2020, which ordered it to unitise its Sakofa field alongside the Afina field of Ghanaian energy company Springfield Energy.
In August 2021, the Ghanaian government made moves to buy back oil licences that no one else wants. It decided to bet on the country's oil production business, as Western investors turned their sights on renewables, and will pay up to $1.1bn to acquire large stakes in the Deepwater Tano-Cape Three Points and South Deepwater Tano oil fields.
Ghana's debt mountain
Furthermore, Ghana has a massive public debt problem, made worse by the Covid-19 pandemic. At an estimated 83% of GDP at the end of 2020, the general government debt is higher than similarly rated peers but not exceptionally so, according to Fitch Ratings. Of greater concern is the high level of debt servicing costs, given structurally low government revenue (in 2019, Ghana’s tax-to-GDP ratio was only 13%). Government debt equals 536% of government revenue and interest costs are above 40% of revenue – this compares with peer medians of 325% and 12.4%, respectively, according to Fitch Ratings.
A group of Ghanaian lawmakers is also trying to pass anti-LGBTQ+ legislation that could see Western investors shunning the country. Before the country’s parliament is a draconian draft law encompassing ten years’ imprisonment for even speaking in favour of homosexual equality. The legislation is being pushed by religious leaders but threatens to damage the country's liberal reputation. In October 2021, the Archbishop of Canterbury Justin Welby said he is "gravely concerned" about the bill.
Moreover, at the end of 2021, a massive brawl erupted in the Ghanaian parliament following a dispute over a proposed tax on electronic transactions. Lawmakers from the two political divides fiercely debated the 1.75% e-levy, which the government says would raise $1.15bn in tax revenue in 2022 alone.
"Ghana was one of the few Fitch-rated sovereigns that experienced positive economic growth in the pandemic year of 2020," says Jermaine Leonard, director, sovereigns and supranationals group at Fitch Ratings. "Real GDP growth was 0.4% and we estimate that growth accelerated to between 4% and 5% in 2021. Ghana experienced average growth of just below 7% in the three years prior to 2020. However, these high growth rates were associated with significant increases in oil production, which we expect to remain mostly flat in 2022 and 2023. We expect Ghana’s medium-term growth to average between 5% and 6% per year, as the domestic sectors of the economy continue their recovery."
Murega Mungai, trading desk manager at AZA Finance, a provider of cross-border payment solutions, says: "The Covid-19 pandemic significantly curtailed Ghana’s economic growth momentum due to the slump in oil prices and weakened global economic activity. The economic outlook is good in the short to medium term, contingent on an increase in demand for Ghana’s exports, improved business confidence and successful implementation of the Ghana Covid–19 Alleviation and Revitalisation of Enterprise Support programme."
The economic importance of Ghana's diaspora
Nana Akufo-Addo – the 77-year-old who has been president of Ghana since January 2017 and whose term of office ends in January 2025 – has had a deliberate strategy of involving the Ghanaian diaspora in the country’s economic growth. In September 2018, he launched a year-long initiative to commemorate "the 400th anniversary of the first recorded forced arrival of enslaved African people to the US" and dubbed it the 'Year of the Return, Ghana 2019'. It resulted in an additional 237,000 visitors coming to Ghana in 2019 and an injection of $1.9bn into the local economy, according to the Ghana Tourism Authority.
Improving links with the diaspora has also helped Ghana to attract foreign investors, including portfolio investors. In March 2021, the sovereign issued $3bn in Eurobonds and received $1bn in IMF Special Drawing Rights in August 2021. The government had indicated plans to issue a further $1bn on international markets in 2022 but abandoned the idea in October 2021 due to market conditions at that time.
However, investors are concerned about Ghana’s ability to service its loans with the average extra premium sought on dollar securities sold by the government now close to distressed levels, according to AZA Finance. In October 2021, the risk premium on Ghana’s Eurobonds jumped by almost 150 basis points (bps) to a yield of more than 900 bps over comparable US Treasury benchmark securities. This sharp increase underlines the country’s growing indebtedness and investors' increasing risk aversion, in particular as the developed world starts to raise interest rates.
“Rarely do countries sustain such high interest burdens for any length of time without a crisis, an IMF rescue or default/restructuring,” said Stuart Culverhouse, head of sovereign and fixed-income research at Tellimer, a London-based economic research house, in a research note in October 2021.
Fitch Ratings forecasts the government deficit – on a cash basis – will narrow to -7.7% of GDP in 2023 from -14% in 2020, with the general government debt-to-GDP ratio continuing to surge until 2023 before plateauing out at below 90% in subsequent years. It says that the medium-term outlook for the public finances is challenging but believes Ghana will more than likely be able to meet its external debt servicing obligations until 2023. However, it has questions about the sovereign's ability to secure new sources of external financing, given that Eurobond markets are likely closed to it. In the event of a crisis situation, it believes the country could receive support from the IMF, at which point it would have to decide whether a debt restructuring was necessary.
The country did not request debt relief during the pandemic, mainly because it feared this could harm its ability to access international capital markets in the future.
"Ghana is helped by the fact that about 45% if its government debt is denominated in local currency," says Leonard at Fitch Ratings. "In addition, Ghana’s external liquidity has improved in recent years – this has been aided by a structural decline in the current account deficit."
Lucie Villa, vice-president and senior credit officer, sovereign group, at Moody’s, says: "About half of the government debt is due in or indexed to foreign currency. That is a challenge for the government because that means it relies on maintaining access to the foreign currency resources and also because it makes indebtedness ratios susceptible to a depreciation in the cedi [the Ghanaian currency], leaving Ghana particularly sensitive to adverse shifts in international investor sentiment. Moody’s B3 rating with a negative outlook does not mean that a default in the form of a debt restructuring or any other form is imminent, but it does say the probability of such a default event occurring is elevated."
Ghana remains dependent on commodities
Ghana's economy remains highly dependent on the export of primary commodities such as gold, cocoa and oil, and consequently is vulnerable to slowdowns in the global economy and commodity price shocks. In general, however, Ghana’s investment prospects remain favourable, as the government seeks to diversify and industrialise – in particular through agro-processing, mining and manufacturing – according to the US State Department. It has made attracting FDI a priority to support its industrialisation plans and overcome an annual infrastructure funding gap of at least $1.5bn.
The most promising sectors include agribusiness, food processing, textiles and apparel, downstream oil and gas, minerals processing and mining-related services sub-sectors.
The Ghanaian economy and investment scene is dominated by Accra. The capital city accounted for between 34% and 39% of the national economy from 2015 and 2020, according to the UN Economic Commission for Africa. In terms of GDP per capita, Accra's economic output per person is three times that of the national average. The services sector accounts for the largest share (63%) of the city's economy, while the manufacturing industry's contribution stands at 20.5%.
In the first six months of 2021, the greater Accra area attracted 96 investment projects, representing 78.69% of all the projects in the country, according to the GIPC. The capital is popular with non-governmental organisations and Western charities, making it one of the most expensive cities in Africa in which to live.
"Ghana is one of the most politically stable countries in Africa, providing a peaceful and predictable operating environment as well as serving as a key point of entry into West Africa," adds AZA Finance's Mungai. "Positive economic outlook driven by service sectors, telecommunications, fast-moving consumer goods and financial services tends to attract foreign investors. Its pro-business stance seeks to boost economic growth with the government focused on providing a better business environment for investors.
"Accra is an attractive city for foreign companies who view the vibrant and cosmopolitan nature of Accra to be an enabler that foreign companies are able to leverage on."
Among 190 countries, Ghana was placed in 118th position in the World Bank's Ease of Doing Business rankings for 2020. Mauritius was the top-placed African country in 13th place, followed by Rwanda, which took 38th place. Kenya was ranked in 56th spot. Ghana was ranked in 75th place among 180 countries in Transparency International's Corruption Perceptions Index 2020. The Seychelles was the best-ranked African country in 27th place followed by Botswana in 35th place.
Ghana is scheduled to be removed from the EU's list of states with weak anti-money laundering and counterterrorist financing regimes, according to the Ghanaian government. It was placed on the list in 2019, but the country introduced its new Anti-Money Laundering Act in 2020.
Ghana has fantastic economic potential. It is spearheading the AfCFTA's development and Accra is positioning itself well as the West African hub for services and manufacturing. Foreign investors in West Africa prefer Ghana to Nigeria as a regional base due to the political instability and the violence in the latter. However, the Ghanaian government must make strenuous efforts to bring down public indebtedness and make it clear it will veto the anti-LGBTQ+ bill before parliament, which could potentially put Western investors off the country.