When Ghana became the world’s newest oil exporter in December, its people had high expectations. “After a long wait, the day has come,” said president John Atta-Mills when he opened the valves on a rig 60 kilometres off the west African country’s coast.
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The effects of oil are already being felt on the economy. Export earnings in the first quarter of 2011 were two-thirds higher than in the same period of 2010. And real gross domestic product (GDP) will increase 13% this year, forecasts the International Monetary Fund. Such expansion would make Ghana’s economy one of the five fastest growing in the world.
Ghanaians believe that becoming an oil producer will transform their country for the better. At the least, it should help end Ghana’s vulnerability to spikes in the price of imported oil, which may have caused many of the country's recent financial crises. But it is hoped that the impact will be far deeper. “We expect the effect of oil on the economy to be massive,” says Alhassan Andani, head of Stanbic Bank Ghana, a subsidiary of Standard Bank.
Curse or blessing?
History shows that the discovery crude of can be as much a curse as a blessing. Ghana hardly needs to look far for such examples. Among its west African neighbours are Nigeria, Gabon and Equatorial Guinea – the ruling elites of which are widely accused of siphoning off vast amounts of oil wealth, resulting in little of it reaching the populations at large.
Ghana’s politicians cannot be accused of being oblivious to the dangers. “We are assuming a very serious responsibility,” added Mr Atta-Mills in December. “And, especially for those who are in leadership positions, we must ensure that it becomes a blessing, not a curse.”
Nigeria, in particular, is cited as a country whose mistakes Ghana should avoid. “Nigeria is one of the best examples of inequality of distribution of resources,” says Gilbert Hie, managing director of SG-SSB, a Ghanaian bank majority owned by Société Générale. “Ghana is at the beginning of a cycle. It needs to make a lot of effort to distribute funds efficiently and make sure they trickle down to all sectors of the economy.”
West African darling
There is much to suggest that Ghana’s experience of being an oil exporter will be happier than those of other west African states, not least its political maturity. Having gained independence from the UK in 1957 – one of the first African countries to do so – Ghana suffered coups and long periods of military rule in the following few decades. But since 1992, when multi-party democracy was established, it has been one of the most stable countries in west Africa.
On a continent still notorious for leaders refusing to accept defeat at the ballot box, Ghana saw two peaceful changes of government after elections in 2000 and 2008. The latter was especially noteworthy, given that the incumbent party lost by fewer than 50,000 votes, only 0.5% of the total.
“We are still developing our democracy and our institutions,” says Stephen Kpordzih, head of government-owned development and commercial lender Agricultural Development Bank. “We are not at the level of European standards yet. But among our neighbours, we are ahead. That gives us hope.”
This stability has led to Ghana being recognised as a safe-haven in west Africa, often at the expense of countries on its border. Many companies shifted their regional headquarters from Abidjan to Accra following the outbreak of civil war in Côte d’Ivoire in 2002, for example.
Testing times
Will Ghanaian politics turn nasty now that oil has been thrown into the mix? The first test of this will come in the run up to the elections in December 2012. Most analysts are optimistic, however. “There’s no reason to think they won’t be smooth,” says Razia Khan, head of African research at Standard Chartered.
“Some say: ‘Can Ghana really succeed in keeping the benign politics that it has had in place for so long now that it’s got oil?’. But there’s really no evidence from day-to-day political events that things are materially worse just because Ghana’s an oil producer.”
It is probably to Ghana’s benefit that it discovered oil fairly late in its development. This meant it entered a new period of being a producer with strong civil society and government institutions in place, unlike Nigeria or Gabon, both of which began pumping crude several decades ago.
“Once governance is established, abuses can be checked,” says Mr Andani. “In countries that haven’t truly benefited, where people talk of the oil curse, they discovered oil at a time when governance was weak and unstable.”
The government’s response so far to the oil discovery has impressed analysts. It has hedged its share of crude sales at $107 a barrel to insure against prices falling below that level. And earlier this year it passed legislation on how it should use export revenues, having collaborated with the parliamentary opposition and turned to Norway for advice.
The Petroleum Revenue Management Act will lead to the establishment of a stabilisation fund to support the budget against economic shocks, and a heritage fund. The latter is meant to serve as an endowment for future generations and will have an advisory committee attached to it that reports to the Ministry of Finance. “It will act as a sovereign wealth fund,” says Kwabena Duffuor, minister of finance and economic planning. “It will invest in high-yielding assets outside Ghana.”
Oil dominance
Ghana seems determined to prevent the oil industry crowding out other economic activity – the so-called ‘Dutch disease’ and a problem common among emerging market countries with newly discovered natural resources. “We have learnt from those who are ahead of us,” says Mr Duffuor. “We have started managing the economy in such a way that we will not suffer the Dutch disease. So the oil won’t be a curse. We are making sure the non-oil sector is managed in a more efficient way.”
This is vital if Ghana is to avoid becoming a ‘mono-revenue state’, a description often applied to Nigeria, which derives about 80% of its government revenues and 90% of its export earnings from oil. That Ghana’s output will remain fairly small in the coming years, with production expected to be capped at 120,000 barrels a day until at least 2014, will help (Nigeria pumps 2 million barrels each day).
But the government is taking few chances. As part of its strategy to boost the rest of the economy, it wants to bring natural gas produced from the oil extraction onshore, rather than flare it, and use it to generate electricity, of which the country suffers a big shortage. “The gas, in particular, must be developed to build up the power sector,” says Mr Duffuor. “At the moment, power is unreliable and expensive. That is acting as a major constraint on businesses.”
There are also plans to exploit other by-products from the oil industry, such as the chemicals that can be used to make fertilisers and increase crop yields.
‘Best ever’ macro-indicators
Ghana can already lay claim to a vibrant, diversified economy. Export earnings have been augmented recently by high cocoa and gold prices, while the telecommunications sector and services, including banking and tourism, are growing and competitive. As a result, non-oil industries will still be responsible for about half the expansion in GDP this year.
The country’s macroeconomic position is strong. The economy grew 7.7% in real terms in 2010 (when oil was not yet in the equation), testifying to Ghana having recovered from a slowdown in 2009 amid the global financial crisis. And inflation has decreased from 20% to 9% in the past two years.
While some analysts criticised the central bank for cutting interest rates by 50 basis points to 13% in May, saying inflation was again on the rise, Mr Duffuor predicts it will fall to 8.5% by the end of the year. “Our macro-indicators are the best ever,” he says. “We are borrowing locally at 10.4%. Two years ago it was 25%. Our [foreign exchange] reserves have gone up from $2bn to almost $5bn in the same period. Inflation has gone down to single figures. And the cedi has been stable since August 2009.”
Shrinking deficits
The public finances have been strengthened by the economy’s buoyancy. The budget deficit shrunk from 15% in 2008 to 11% last year. It is forecast to fall to 5.5% this year and 3% in 2014, according to Mr Duffuor, who says this has much to do with reforms aimed at improving revenue collection.
The government began to borrow more heavily in the run-up to oil being produced (Ghana’s Jubilee field, from which it pumps its crude, was discovered in 2007). This caused the country’s debt to increase from 31% of GDP in 2006 to 48% last year. Most analysts say, however, that those levels are sustainable, given the government’s commitment to spend wisely and the boost to revenues from hydrocarbon exports.
Foreign investors are not shying away from Ghanaian exposure. The last local currency bond they were permitted to buy, a three-year deal in October, was three times oversubscribed. As such, many think the government, which hardly ever prints cedi bonds with maturities of more than three years, should extend its debt curve in the manner of Kenya, which issues up to 30 years, and Nigeria, which sells 20-year paper.
“Three years doesn’t quite do it for a country’s development,” says Standard Chartered’s Mr Khan. “There’s been a great reluctance to issue longer-dated debt in Ghana on this flawed assumption that it will lock in higher interest rates, which is very short-sighted. It needs to start looking at refinancing risk.”
Eurobond or China?
Ghana, rated B by Standard & Poor’s and B+ by Fitch, could also lengthen its curve by selling a second Eurobond, following its $750m 10-year deal issued in 2007. Sold with a coupon of 8.5%, that has tightened in the secondary market and was quoted at 5.8% in early June. “We are hoping it will trade up further,” says Mr Duffuor. “If so, we can think about another Eurobond.”
Mr Duffuor adds, however, that with the Chinese government and state-controlled institutions offering funding, there might be little need to tap the capital markets. “They provide huge facilities,” he says. “If we can get them for our infrastructure projects, why shouldn’t we go for them if they’re cheap?”
Despite all its potential and the fact it was recently upgraded from a low- to middle-income country, Ghana faces big challenges and suffers many of the problems common throughout sub-Saharan Africa. Its lack of infrastructure, particularly transport and power, hinders growth, especially of manufacturing businesses. The agriculture sector, which still employs about 60% of the population and accounts for 40% of GDP, is largely undeveloped. Only about a quarter of the country’s arable land is cultivated, large-scale commercial farming is rare and most farmers have no irrigation.
“Ghana is seen from abroad as a modern country,” says Mr Hie of SG-SSB. “But, in fact, it is still a developing country. It is good looking from the outside. But if you travel inside it, you see there’s a huge lack of infrastructure.”
Shallow markets
The shallowness of the capital markets gives international fund managers few opportunities to invest their money and leaves local companies dependent on banks to raise finance. The corporate bond market is all but non-existent, while Accra’s stock market lacks liquidity and is dominated by one firm, gold miner AngloGold Ashanti, which makes up 64% of its capitalisation.
While the middle class is growing, leading to more domestic consumption, about one-third of Ghanaians still live in poverty. This is reflected in the fact that fewer than 5 million people, out of a population of 24 million, have bank accounts. And despite the arrival of oil, Ghana is unlikely to wean itself off foreign aid for at least 10 years, says Mr Duffuor.
Ghana also pales as a consumer market in comparison with Nigeria, which has a population of 158 million. Ghanaian bankers say that those looking to make investments in west Africa often favour Nigeria because of this, despite its problems with corruption and haphazard governance. “Our shortcoming is size,” says Ken Ofori-Atta, co-founder and executive chairman of Databank, Ghana’s biggest investment bank. “Nigeria offers incredible scale and potential profits.”
Nonetheless, Ghana stands out as one of Africa’s brightest prospects. Within west Africa, it is seen as an example for other countries to follow, particularly because of its strong political and civil society institutions. Its media is outspoken and unafraid to expose the government’s failings. Enterprise and foreign investment are widely encouraged, the result being an increasingly sophisticated economy.
Making sure oil does not become a curse is a stern test for any country, not least one in such an historically volatile region as west Africa. But Ghanaians are confident that their oil wealth will not be squandered and that it can be exploited to benefit the country as a whole. For this to happen, Ghana will have to do things differently from its west African neighbours.
