As frontier markets, the countries of Africa represent tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
AFKInsider has compiled news you need to know now about African currency markets in order to slim down your currency risk. Let’s see what’s happening out there.
This week we explore one of the most hyped economies in Sub-Saharan Africa – Ghana, a country rich in minerals and oil and which has consistently ranked near the top of emerging Africa’s growing markets. Yet, behind all the growth lies systematic problems that, if left to fester, could derail one of continent’s rising stars.
What is the hype all about?
The past several years have seen something of a transition in the pattern of Ghanaian gross domestic product growth. From 2003 to 2007, the West African country racked up steady, consistent economic growth on the order of 5 percent to 6.5 percent a year. Certainly not spectacular compared to some of Africa’s other growth engines, but respectable, consistent and steady. Past performance is no guarantee of future performance, but in Ghana’s case the five-year span of steady growth seemed to defy that golden rule of investing.
Figure 1:
Ghana’s GDP Growth,
Percent Increase, 2003 – 2011
Source: World Bank
Then, in 2008, the economy shifted and growth became much more erratic. Ghana’s economy was still growing, but unlike the previous five years, the period from 2008 to the present has seen wide swings in performance. While Ghana’s economy grew at the impressive rate of 14.4 percent in 2011, it also experienced a slump in its growth rate in 2009 to a decade low of just under 4 percent. Still, despite this variability, growth in the latter half of the last decade was noticeably higher, averaging 8.6 percent per year as opposed to just below six percent in the previous five years.
This shift to a higher, more variable growth rate is due to a number of factors. Certainly, the flood of hot money from the U.S. and the European Union after the 2008 financial crisis helped, as has continuing trade with and investment from China. Also important, near neighbor Nigeria’s continuing growth helped spur development and growth in all West Africa, including in Ghana.
More fundamental than these background drivers to growth, however, is Ghana’s new status as an oil producer and exporter. In 2007 prospectors announced the discovery of five billion barrels of crude oil in fields 30 miles off Ghana’s coast. Since production began in late 2010, Ghana has produced approximately 110,000 to 125,000 barrels a day at prices averaging around $100 per barrel – a huge windfall for this relatively small country of nearly 25-million people.
Adding $3 billion to $4 billion in additional income per year through oil sales – not to mention the continued flood of foreign investment into the country aimed at doubling the size of Ghana’s infant oil industry by 2021 – explains much of the country’s economic performance in the last five years. Ghana is quickly becoming an oil economy, and while gold sales and cocoa exports remain top income earners, oil wealth and its associated problems are making an impact.
These problems were highlighted in a recent article in the Financial Times, which noted that though the country exhibited all the outward signs of wealth and prosperity, oil-fueled economic headaches were becoming more prominent. Inflation, for instance, increased to 11.9 percent while government debt – bloated by loans supported by expectations of future oil revenues – now amounts to 50 percent of GDP.
All this hit the country’s credit rating. At least one agency – Fitch – downgraded it from B+ to B in October. The International Monetary Fund also issued a warning to many in emerging Africa, including Ghana, that increased dependence on foreign money and reckless spending on consumption, rather than capital investment aimed at increasing long-term growth potential could lead to a financial crisis.
The steady collapse in value of the Ghanaian currency since 2008 shows macroeconomic problems caused by the country’s new oil wealth are felt in one area of Ghana’s larger economy that also happens to be its most visible. None of this means, of course, that Ghana is destined to suffer the same fate many other oil exporters, but investors would be wise to keep an eye out for problems in the future. Past performance is no indicator of future returns, true, but as the sage George Santayana once said, those who forget history are often doomed to repeat it.
Figure 2:
Ghanaian Cedi per US Dollar, 2007 – 2013
Source: XE.com
Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider, Mint Press News and BAM South.
