* Ghana earning reputation as "Switzerland of Africa"
* But investors concerned about currency, growing deficit
* Illiquid stock market is barrier to increased investment
By Tosin Sulaiman
JOHANNESBURG, Dec 19 A closely fought but
peaceful election in Ghana this month has burnished the
international image of the west African oil, gold and cocoa
producer as "the Switzerland of Africa."
But to win economic bragging rights too, Ghana's new
government will have to convince investors that it can tame a
swelling fiscal deficit, stabilise a volatile currency and
rebuild foreign exchange reserves that have declined this year
while those of other African economies have grown.
Elected President John Dramani Mahama's administration will
have to confront these challenges while economic growth slows -
albeit to a robust 7.8 percent projected for 2013, from a
blistering 14.5 percent last year.
Then there is the pressure of high expectations from
ordinary Ghanaians impatient to see the benefits of oil
production, which started in 2010.
Investors say they would also like more opportunities to
participate in Ghana's capital markets, but the main constraints
are a bond yield curve that ends at five years and a small and
illiquid stock market with just 34 listed companies.
"Ghana is one of our favourite places," said Sven Richter,
head of frontier markets at Renaissance Asset Managers. "We
would have more in Ghana if there was more liquidity. We have
less than one percent of our fund there and we'd quite happily
have 10 percent."
Despite a legal challenge by the opposition to Mahama's
narrow victory earlier this month, the largely incident-free
election in a region known for coups and civil wars has given
foreign investors comfort.
"Someone described Ghana to us as the Switzerland of Africa.
I think that's an apt description," said Ayo Salami, chief
investment officer of asset manager Duet Group's Africa
Opportunities Fund. "There seems to be a continuing commitment
on the part of the government to institutional reform, to
embedding democratic culture. All these are things we like."
But the government has to show it is serious about cutting
Ghana's twin deficits - on its budget and current account -
which are putting pressure on the currency, Salami said, echoing
the concerns of credit rating agencies.
Continuing an election year trend, heavy public spending
forced the government to revise its 2012 budget deficit target
to 6.7 percent of gross domestic product (GDP), from the
original 4.8 percent. Some analysts think it could end up in
double digits when figures are published next year.
Fitch, which affirmed Ghana's B+ rating in September, said
the gap reflects a combination of repayment of arrears, public
sector wage increases and higher energy subsidies.
Finance Minister Kwabena Duffuor said last week the country
would pursue a fourth year of fiscal consolidation in 2013,
expecting oil, agriculture and an infrastructure programme to
underpin economic growth.
Salami at Duet Group warns, however, against relying too
much on oil, even if output is set to increase to 120,000
barrels per day next year, from around 90,000 bpd now.
"I know the government is hoping or waiting for oil revenues
to come as the cavalry over the hill to sort this out for them,"
he said. "What usually happens is that when governments get a
new source of revenue they find a new way to spend it."
Ghana's current account deficit is likely to hit 14 percent
this year, from 11 percent last year, due to infrastructure
spending and demand for imports from local businesses and a
growing middle class.
The deficit contributed to a near 20 percent depreciation in
the local cedi currency in the first half of the year before the
central bank intervened.
But its efforts to shore up the cedi have hit Ghana's
foreign exchange reserves, now at $5.2 billion or 2.9 months of
imports, just below the traditional 3-month benchmark. Ghana
also bucks a sub-Saharan African trend as Nigeria, Kenya,
Mozambique and others have built up their reserves this year.
While the smooth elections may have allowed investors "to
cut the country a bit more slack", the worsening fiscal picture
means they will not do so for long, said Giulia Pellegrini, JP
Morgan strategist for sub-Saharan Africa.
She expects the cedi to lose another 5-8 percent in the new
year. "Investors will increasingly be monitoring the fiscal and
current account situation," she said.
"People are taking in the full picture rather than simply
saying 'it's stable, it's looking good, let's just go for it'.
They're becoming more discerning if anything."
The country's rapid accumulation of debt since debt relief
is also a cause for concern, Pellegrini said, with external debt
currently at $7.8 billion, nearly double its 2008 levels.
Finance Minister Duffuor said Ghana would issue a second
Eurobond next year, which should help to lower borrowing costs.
Ghana's 2017 bond is trading at a yield of
4.9 percent, much lower than the 21 percent investors demanded
for a 3-year domestic bond sold in October.
Given high liquidity globally and the success of previous
Eurobonds from African sovereigns, the issue should do well. But
investors could make Ghana pay if it does not work on its
budget. "Investors would still show quite a bit of interest but
would want to be compensated for that," Pellegrini said.