Ghana Cedis
Source: Felix Bannerman & Adomako Osei-Frimpong
This economic bulletin analyzes events affecting the banking sector for the half year to June 2009. Global events, domestic events and events peculiar to the banking sector whose impact affects the operations of MBG have been mentioned.
Highlights of the World and Ghanaian Economy
Growth for the world economy in 2009 has been revised up slightly by 0.1% to show a decline of 1.3%. This minor change was due to upward revisions mainly in China and India. Developments in these economies have been improving lately, justifying an upward revision for the full year. China’s growth forecast for 2009 was increased from 6.5% to 7.0% while India was revised up from 5.0% to 5.7%. The forecast for the OECD countries remains unchanged at minus 3.8% with US GDP expected to decline by 2.8%, the Euro-zone by 4.2%, and Japan remaining very weak with an expected contraction of 6.4%. While developing Asia has seen some positive momentum, it remains to be seen whether the measures taken by OECD countries are able to produce a sustainable recovery.
Latest available numbers from the Ghana Statistical Service on the Ghanaian economy showed a surge in GDP growth to 7.3 percent for 2008 driven in part by the fiscal overruns in 2008 which generated considerable stimulus in the economy and by strong private sector growth. The agricultural and industrial sectors exerted the upward force on the growth numbers for 2008.
The latest surveys conducted in April 2009 shows some slowdown in economic activity below historical trend and further drops in business and consumer confidence. At the same time a survey of credit conditions at the commercial banks shows a net tightening of credit conditions for all categories of borrowers in the first quarter of 2009 suggesting that GDP growth is moderating.
The Board of Directors of the World Bank on 30th June 2009 approved a total of US$535 million to support three credit facilities aimed at helping improve economic governance and stabilizing Ghana’s economy. They are:
- Economic Governance and Poverty Reduction Credit (EGPRC) – US$300 million
- Transport Sector Project – US$225 million
- Natural Resources and Environmental Governance (NREG) – US$ 10 million
These first set of credits are part of US$1.2 billion the Bank plans to support the government of Ghana with over the next three years.
Inflation
Headline inflation declined marginally in the month of May compared to April to 20.06% representing a fall of 0.5 percentage points. This is the first decline since October, 2008 and was mainly on the back of slower growth in food prices during the period. According to the latest CPI newsletter, food inflation decreased in the month of May from 19.3% in April to 17.2%, while non-food inflation increased by 0.8 percentage points to 22.2%. Compared to the rate in December 2008, there has been a 1.9 percentage point’s increase in the rate of inflation while there has been a 3.2 percentage points increase compared to inflation rate of 16.9% recorded in May 2008.
The trend in the inflation rate for the year 2008 showed a consistently increasing rate until June 2008 when the nation recorded what then became the highest rate for the year at 18.4%. The inflation rate thereafter saw a four-month decline to October 2008 when it pegged at 17.3%. November saw a slight increase while December also increased by a larger percentage point compared to November. The increasing trend in the first part of 2008 was repeated in 2009 with increases from January through April. However there was marked slow down in the rate at the end of April 2009, staying virtually flat compared to March while May saw a 0.5 pp decline.
Annual food inflation dipped significantly while non-food inflation edged up slightly at the end of May 2009.
- Food inflation decreased by 2.2 percentage points from 19.3% in April 2009 to 17.2% by the end of May 2009. This brings year-to-date increase to 1.3 percentage points.
- Non-Food inflation as at May 2009 stood at 22.2% which represented an increase of 0.8 percentage points compared to April 2009. Relative to the beginning of the year, non-food inflation has increased by 4.5 percentage points.
- Compared to May 2008, there has been a year-on-year increase of 0.5 percentage points in Food inflation from 15.8%.
- Non-Food inflation on the other hand posted a year-on-year increase of 3.1 percentage points from 17.7% at the end of May 2008 to the current rate of 22.2%.
Regional Inflation Analysis
- Five Regions experienced declines in their rate of inflation ranging between 0.5 and 5.4 percentage points with the Volta Region experiencing the largest decline of 5.4 percentage points. Four Regions witnessed increases in their rate of inflation with the Eastern Region recording the highest increment of 2.1 percentage points.
- The Greater Accra Region in May recorded the highest rate of inflation of 26.5% increasing from 24.6% in April 2009. The Eastern Region followed with a rate of 23.1% which was up by 2.1 percentage points compared to the rate recorded in April 2009.
- The Western Region recorded the lowest inflation rate of 12.6%. This rate represented an increase of 0.3 percentage points’ compared to 12.4% in April 2009 which was the lowest rate for the month. The Region also recorded the lowest inflation rate of 15.3% in March.
- Five regions, Western, Central, Volta, Brong-Ahafo and Upper Regions experienced rates of inflation which were below the national average while the remaining regions attained rates above the national average.
- The Greater Accra Region recorded the highest food inflation of 33.5%, a decrease of 2.2 percentage points compared to April 2009. Food inflation at 7.9% was lowest in the Upper Region. This rate was 4.8 percentage points lower than that recorded in April 2009.
- The Ashanti Region recorded the highest non-food inflation of 27.9% compared to the 27.3% recorded in the Region in April 2009. The lowest non-food inflation of 13.0% recorded in the Western Region was down by 1.3 percentage points compared to April 2009.
Inflation Outlook
The month of June saw a 30% increase in the price of petroleum products ahead of a 17% increase in transportation fares. As was stated in the previous month, this development was expected and will likely feed into future inflation rates. The current month saw a decline in the inflation rate; however the lagged effect of the recent petroleum prices is yet to feed into the rate. A continuous decline in food inflation will be a major factor in keeping the rate of inflation declining in the coming months. The downside risk is posed by the increasing price of crude oil on the international market and the continuous depreciation of the cedi to the major international currencies. Risks are firmly on the downside suggesting that the much anticipated downward trend in the rate of inflation in the second half of the year will not come to pass. Analysts will also be watching the next move by the Bank of Ghana at the meeting of the Monetary Policy Committee on the back of criticisms of the Inflation Targeting Regime and calls for its abolishment to determine the right direction of the inflation rate.
Exchange Rate Developments
The six month period to the end of June 2009 indicates depreciation rates of 16.83%, 27.21% and 16.6% respectively against the USD, Pound Sterling and Euro. This is in the face of current exchange rates of GH¢1.45, GH¢2.42 and GH¢2.02 respectively USD, Pound Sterling and Euro. This translates to depreciation rates of 2.43%, 5.77% and 3.07% between the months of May and June for the three currencies in the respective order. This compares to depreciation rates of 1.38%, 8.71% and 6.41% against the USD, Sterling and Euro respectively between the months of April and May 2009 indicating a mark up in the depreciation rate of the dollar while that for the Pound Sterling and the Euro slowed down between May and June, a departure from the situation observed in the previous month.
Compared to the interbank exchange rates published as at the end of June 2008, the cedi has depreciated by 29.89%, 15.63% and 21.96% against the USD, Sterling and Euro respectively as at the end of June 2009.
Exchange Rate Outlook
The approval of a credit facility to the Government of Ghana by the World Bank will ensure the long awaited inflow of foreign currency that is expected to stabilize the rapid fall of the cedi. The first tranche of $150 million will be effected in July and the rest will be effected when certain actions that the Government has committed itself to is taken. This means that when the Government delays in taking the said actions, the release of the funds may be delayed and this could lead to delays in programmes that are dependent on the payment of the funds. We do however expect that the credit facility will begin the process of eventually stabilizing the exchange rate of the cedi against the major currencies. Continuous increase in the price of crude oil on the international market is expected to increase the oil bill for the country which will negatively affect the Gross International Reserves. Thus crude oil price increases pose a downside risk to the stability of the local currency.
Money Market and Interest Rates Developments
Interest rates on short term instruments of the traded Government of Ghana Securities inched up in the month of June while that of the long-term stayed flat.
- The 91-day Treasury bill inched up to 25.84% as at the end of June 2009, a change of 0.06 percentage points compared to May 2009. On year-on-year basis, there has been an increase of 9.52 percentage points from 16.32% as at the end of June 2008. On year to date basis, the 91-day treasure bill has inched up by 1.17 percentage points.
- The 182-day Treasury bill also increased by 0.32 percentage points to end the month of June 2009 at 28.82%. Year-on-year, the 182-day Treasury bill has increased by 11.69 percentage points whilst the year-to-date increase stood at 2.52 percentage points at the end of June 2009.
- Interest rate on the 1-year Note was flat between the months of May and June 2009 at 21%. Year-on-Year increase in the 1-year Note stood at 4.5 percentage points by the end of the month of June 2009.
- Interest rate on the 2-year Fixed Note also stayed flat between May and June 2009. The 2-year Fixed Note has increased by 4.50 percentage points on year-on-year and remains unchanged on monthly and year-to-date basis.
- Shorter Dated Government of Ghana Securities continue to increase in line with investors increased demand for such instruments. The longer dated instruments have remained virtually flat due to increased inflationary expectations. The current decline in the inflation rate will not send the strong signals needed to reverse this trend. On the other hand investors and market analyst will be watching to see if this downward trend in the inflation rate persists. Until that time, we do not expect to see a marked reversal in the market for Government of Ghana Securities.
Cocoa, Gold and Crude Oil Prices
Price of cocoa at the end of June 2009 was $2,593.91 per metric tone, a decrease of 2.8% over the price in May 2009. Year-on-year, the price of cocoa has decreased by 19.1% from $3,206.38 at the end of June 2008. Year to date the price of cocoa has fallen by 3.1%.
Gold price on the other hand decreased by 5.2% from $979.60 an ounce in May 2009 to $928.50 an ounce by the end of June 2009. Year-on-year, the price of gold at the end of June 2009 indicates an increase of 0.4% while that of year to date indicates an increase of 5.4% (see Table 5).
The price of crude oil on the international markets turned down by 0.7% between the months of May and June 2009 to $66.89. This brings the year-on-year decrease in the price of crude oil to 52.6% from $141.22 at the end of June 2008 while on year-to-date basis, there has been an increment of 59.1%.
Outlook
The mid crop has unfolded at a rather slow pace, with about 60tmt of cocoa beans arrivals reported in 5 weeks since the beginning of May in the Ivory Coast, compared with 73tmt in the 07/08 season and 91tmt in the 06/07 season. Declared purchases in Ghana stood at 622,862mt by May 28th, slightly off the 645,038mt reported at this time last season. May purchases (“technically” made of mid crop, even though the Cocobod still classify them as within the official main crop season) have remained around 5,000-8,000mt per week, a relatively small volume. The market is now increasingly devoting its attention to the 09/10 main crop development, with some keys estimates by prominent cocoa market analysts expected to be issued by the end of this month. This will allow the cocoa market participants to trade on more fundamentally-sound information than had been the case these past few weeks. Factors expected to cause the price of cocoa to move upwards include the expected large deficit for the 2008/2009 season and the fear of another large deficit in the upcoming season. The ongoing recession however poses a downside risk to the expected price increase.
The rally of gold towards the $1000 mark has been curtailed by a stronger dollar and reduced fear of economic collapse. The price fell first to around $950/oz and then back towards $930/oz on 13th June, where it held. It will therefore take a truly strong swing towards a much weaker dollar to see the price get to and sustain itself at $1,000/oz. The next major event in the gold market is likely to be details of the renewal of the Central Bank Gold Agreement (CBGA) and, related, the IMF’s proposed sale of 403.3t of its bullion reserves. With further dollar gains likely we see gold falling back to levels seen in April.
Demand for gasoline typically surges during the summer driving season and refiners try to increase their throughputs. Over the last few weeks, some positive developments have been seen in the gasoline market. However, under the current economic situation, gasoline demand is not expected to increase significantly in the coming months and hence would provide only limited support for the oil market. Additionally, ample spare refinery capacity in the Atlantic Basin should ease any risk of gasoline supply shortages during the current driving season. In light of the considerable challenges the world economy and commodity markets, particularly the oil market, have undergone, the worst appears to be behind us. Providing this more optimistic sentiment holds, ongoing efforts to reduce the excess supply is the key factor in supporting market stability and should help to gradually bring commercial inventories back to more healthy seasonal levels by the end of the year. In line with these efforts, OPEC Member Countries at the recent Meeting of the Conference have reiterated their firm commitment to agreed production levels, as well as their readiness to respond swiftly to any developments which might place oil market stability at risk. A key uncertainty facing the market is the sustainability of the more optimistic sentiment currently in the market, which will largely depend on improvements in the real economy and in financial markets.
Banking Industry
PWC Ghana published the results of the annual Banking Survey for 2008 in the month under review noting that the effects of the global financial crisis will be more acute in 2009 through falling equity markets, reversal of capital flows, rising inflation and pressures on exchange rates.
All players in the banking industry managed to adopt the IFRS reporting standards for the period ended December 2008 which formed the basis of the PWC analysis. Other notable events that have occurred in the industry are enumerated below:
- ADB, GCB, MBG and BBGL have already crossed the bridge in attaining the minimum capital set by the Central Bank. It is envisaged that most of the foreign Banks will receive support from their parent banks while the domestic banks are looking at other means of raising their capital including private placements, rights issues and listings on the stock market. Mergers and acquisitions seem not to be an option for many of the banks except for the ongoing discussions between MBG and TTB.
- Banks focused on enhancing and promoting existing products to improve visibility and upgraded banking IT platforms to enhance service delivery. The following banks had the highest additions to their existing branches in 2008:
- BBG – 59
- EBG –12,
- GCB – 11
- GTB – 6,
- HFC – 6
- The regulatory landscape was strengthened with four new Acts; Non-Bank Financial Institution Act, 2008 (Act 774) Home Mortgage Finance Act (Act 770), Borrowers and Lenders Act (Act 773) and Anti-money Laundering Act (Act 749).
- The industry’s operating assets grew by 40% (but real growth was 18%) from the end of 2007. Cash assets had the highest growth rate of about 50%.
- The value of Q1 operating assets grew from GH¢4.26 billion (2007) to GH¢5.51 billion in 2008. The number of Q1 banks remained at six from 2007. Stanbic – joined the ranks of the industry’s “top” quartile banks. MBG exited to Q2. GCB led the group, holding 16% of the industry’s total operating assets.
- Q2 operating assets grew from GH¢1.1 billion (2007) to GH¢2.24 billion in 2008. Q2 banks increased in number from five to six between 2007 and 2008. Three Q3 banks entered; ZBL, HFC and FAMBL. PBL and TTB exited into Q3 and one Q1, MBG, bank joined. MBG was the only bank which recorded a decline in operating assets, by 6%.
- Q3 operating assets grew by 61% from GH¢0.89 billion to GH¢1.43 billion. Q3 banks similarly increased from five to six. IBG exited into Q2 with a remarkable growth of over 200% while TTB and PBL fell from Q2 to join the group. ABL, Fidelity and UBA maintained their membership in the group from 2007.
- Except for GTB whose operating assets more than tripled from 2007 to 2008, Q4 banks’ operating assets had modest growth, between 29% and 56%. There were no movement in the number and composition of Q4 banks. The “newest kid on the block”- Baroda- made its debut in this group.
Conclusion and Recommendation
The first half of the year has been very challenging for the banking industry in particular and the economy at large. A new Government was put in place with an entirely different economic philosophy from what the country has seen in the past eight years. According to the Bank of Ghana Composite Index of Economic Activity (CIEA), confidence in the economy waned slightly in the course of the period. Then also has been the current situation where financial institutions have curtailed loans and advances to both the individuals and private enterprises. Due to the persistent rising inflation, the Bank of Ghana has had occasion to increase the Prime Rate by 1.5 percentage points. This occurred in February and Banks duly responded by increasing their average base rates. It has however been determined that individuals and private enterprises have reduced their demand for bank credit. All these events have occurred on the back of increased competition, introduction of new products or a variation of existing ones and expansion in the number of bank branches.
At best the above situation could be described as dire as they are bound to ultimately impact on the bottom line. There is the need for innovation and out of the ordinary way of doing things to ensure that MBG does not find itself in a difficult situation.
In times past, the department has had the occasion to comment on how the bank can take advantage of opportunities presented by Microfinance, Mortgage financing and the Oil find.
Many banks have already jumped on the Microfinance bandwagon thus making the terrain difficult for new entrants. It is only a strong management will to enter the industry that will get MBG to survive in an industry that is increasingly becoming highly competitive. The oil industry however provides enormous opportunity which MBG can easily take advantage of before other players enter and make the industry a difficult one. Opportunities presented by Mortgage financing still exist as the housing deficit in the country continue to increase.
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