Economy shows resilience in the face of challenges
The domestic economy registered some gains in the second quarter of the year after successfully weathering some of the key challenges within the period, a report by UMB Stock Brokers has indicated.
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The challenges included the upward adjustment in the ex-pump prices of petroleum products earlier in the year, and its pass-through effect on food prices, utility tariffs, and the recurring energy supply deficits.
The reported noted that the latest update of the Bank of Ghana’s (BoG) Composite Index of Economic Activity (CIEA) reflected some modest pickup in 2016, although at a slower pace compared to the same period last year.
Over the period, inflation slipped from 19.2 per cent at the end of March to 18.7 per cent in April. It, however, rose by 0.2 per cent to 18.9 per cent in May on the back of fuel price adjustments. In June, the rate declined to 18.4 per cent also on the back of reduced prices of non-food items.
Policy rate
Within the period, the Monetary Policy Committee (MPC) of BoG met twice over the period. At the end of its 70th and 71st meetings, the committee maintained the Policy Rate for the fourth time this year at 26 per cent.
Following a review of domestic and external economic developments during the first six months of the year, the MPC, in arriving at its decision, noted the progress in inflation and other key indicators.
Tight policy stance and improved inflows helped the local currency to register some stability on the international forex market.
Debt management
As at the end of June, the Cedi had depreciated by 3.28 per cent against the US Dollar, compared to a depreciation of 26.05 per cent in the same period last year.
With the government aiming to sustain its fiscal consolidation through the International Monetary Fund (IMF) programme, GDP for Q1 2016 came in better at 4.9 per cent compared with the 4.5 per cent recorded the same period last year.
Nevertheless, capping public debt proved difficult as the stock of public debt increased to GH¢105.1 billion at the end of May 2016, representing 66.4 per cent of GDP, as against GH¢103.1 billion at the end of March 2016, representing 65.1 per cent of GDP.
The financial summary recently published by BoG also indicated a sharp swell in commercial banks’ Non-Performing Loans ratio (NPL) from 14.6 per cent in January to 19.3 per cent in May, and Capital Adequacy Ratio plunging to 16.6 per cent in May from January’s 17.9 per cent. This poses risks to banks as their exposure to credit risk weighs on their balance sheets. This effect may bear on business and reduce business and consumer confidence in the coming months.
In other news, the regime of high interest rate and power cuts resulted in a number of companies laying off workers.
This was underpinned by a survey conducted by the Institute of Economic Affairs, (IEA) who identified unemployment to be the economy’s biggest challenge.
Stock market
In the stock market, Fan Milk (FML) was the lead gainer within the period with a price hike of 16 per cent. Aluworks (ALW) shareholders were be disappointed going another year without dividends.
However, however a hopeful investment of US$25 million from Vedanta Resources, one of the world’s largest diversified natural resources companies, helped the stock to add 13 per cent at the end of the quarter.
Attractive bargain prices compared to year open led to Ecobank Transnational Incorporated (ETI) also gaining 6 per cent within the period.
On the flig side nine out of the twelve financial stocks lost ground. These were EGL, HFC, SOGEGH, EGH, SIC, SCB, GCB, UTB and CAL.
Other Blue Chip stocks in the red zone included UNIL, GGBL, GOIL, BOPP and TOTAL. Bargain buying and selling pressure led to AYRTN, MLC, PZC, PBC and ACI clipping off some pesewas during the quarter.
The volume of trade dipped to 25.22 million in Q2 2016 as investors’ risk appetite reduced. Fan Milk Ltd (FML) emerged as the most traded stock.
Money market
Treasury rates remained sticky at present levels since the beginning of the year as the government strives to keep a lid on the economy. The yield on the 91-day bill rose by 13 basis points at the end of March to 22.79 per cent at the end of June.
On the other hand, the 182-day bill was down 3 basis points to 24.6 per cent, while the 1-Year, 2-Year and 3-Year Notes remained flat at 23 per cent, 24.25 per cent and 24.5 per cent respectively, with a stable outlook.
In all, a total of GH¢15.8 billion was raised by BoG from bills and notes. Funds raised this quarter were higher when compared to the GH¢13.58 billion sourced by the Central Bank to meet maturing bills of the government during Q1 2016.
Forex market
The Cedi was under pressure during the period under review, losing value against the major trading currencies. Though the Central Bank frequently intervened in the market to boost the performance of the local currency, the Cedi closed the quarter lower against the US Dollar, Euro, Swiss Franc and South African Rand. However, the Cedi appreciated against the British Pound as the current uncertainties and volatilities after the Brexit vote weighed on Britain’s currency.
Outlook
The domestic economy is expected to witness more improvements during the third quarter as we do not foresee any major threatening developments.
Inflation is projected to ease in the coming three months with a boost from bumper harvest usually in July, August and September which will slow food price increases. Additionally, falling fuel prices on the world market and the relative stability in the local currency will also ensure weaker headline month-on-month inflation gains.
The Institute for Energy Security has also recently projected a drop in prices of fuel on the local market in July.
The recurring energy supply challenges may however present risks to inflation. The tight policy stance, additional oil and gas production from the TEN oil fields projected to start in August 2016, inflows from the US$2.0 billion cocoa syndicate facility and expected issuance of the Eurobond in Q4 2016 will also boost reserves, improve liquidity on the foreign exchange market and provide support for the country. The uncertainties in the global economy and gloomy global sentiments have lifted the outlook for commodity prices; the continuous uptick of cocoa and demand for gold will also boost the nation’s earnings.
On the back of the foregoing, there is the likelihood that the easing cycle will start in the third quarter at the MPC’s meeting in September. 8 The major concerns to the growth outlook would be power supply shortfalls which are putting a strain on business and consumer budgets, continued fiscal tightness and tight credit conditions. Britain’s exit from the European Union (EU) could also negatively impact the country’s trade sector, Foreign Direct Investments (FDI) and the Cedi. With Ghana currently being U.K.’s fifth largest trade partner in Sub-Saharan Africa, we foresee some loses in budgetary support. With BoG subject to a zero deficit financing rule, we expect some upward pressure on rates as government borrows more from the domestic market to meet its financing needs. Much deviation is however not anticipated on the money market, as macro-economic conditions have not changed. As against some analyst views, we do not anticipate significant impact of the December general elections on the domestic economy.