High volatility of Cedi to discourage investment in Ghana’s infrastructure – Fitch
Adnan Adams Mohammed
Fitch Solutions forecasts Ghana’s construction industry to grow by 4.1% year-on-year in 2022, a slowdown compared to the estimated growth of 5.7% year-on-year in 2021.
The rating agency notes that, despite the market’s strong fundamentals, including a track record of private investment in energy infrastructure, comparatively high political stability and security, and a relatively diverse competitive landscape, it expects that a substantial depreciation of the cedi against the US Dollar in 2022 will, in the near term, make private investors more reluctant to invest in Ghana’s infrastructure sector.
Further indicating that, it do not expect that private investment will meaningfully cushion the negative impact of subdued public infrastructure spending on the market’s construction industry growth, the agency said.
“We forecast that in 2022, the Ghana cedi will depreciate by 22.7% against the USD, significantly increasing revenue risks for the foreign investors that rely on expatriation of revenues”, Fitch Solutions, thus, said. “We forecast government capital expenditure to shrink to 3.3% year-on-year of GDP in 2022 and 2.9% year-on-year of GDP in 2023, down from 3.7% year-on-year in 2021”.
“While this puts capital expenditure levels above those in 2018-2020 when Ghana’s construction industry growth averaged -0.1% per year, it remains below the comparatively high annual average levels of 4% of GDP between 2010 and 2017.”
During the period between 2010 and 2017, the construction industry growth average of 8.1% per year.
But the Governor of Bank of Ghana, Ernest Addison, said developments in the global capital markets, combined with internal challenges that resulted in the rating downgrade of Ghana’s economy, have played out to exacerbate price and exchange rate pressures in the domestic economy.
The Ghana cedi, he noted, came “under severe pressure in the first quarter of 2022 as offshore investors exited positions in domestic securities at a time when domestic demand for forex had increased”.
Speaking at the 6th CEO Summit in Accra, last week, Dr Addison said: “The FX pressures, coupled with tight forex liquidity due to absence from the international capital markets, contributed to the significant currency depreciation”.
Cumulatively, he said the Ghana cedi depreciated by 15.8 per cent against the US dollar in the year to 18th May 2022, compared with an appreciation of 0.5 per cent in the same period of 2021.
“To ease off increased volatility in the foreign exchange (FX) market, the Bank extended the forward auctions to include the Bulk Oil Distributing Companies”.
“This formed part of the measures taken by the Bank to address the FX liquidity constraints within the local petroleum sector and aid price discovery, especially for the general pricing window within the downstream sector”, he noted.
Also, Dr Addison said recent price developments indicate elevated pressures from both domestic and external sources.
These include the global energy and food price shock, and its consequential upward adjustments on domestic ex-pump petroleum prices and transportation costs, domestic food prices, as well as the passthrough effects of the recent exchange rate depreciation.