Ghana holds rate but won't hesitate to tighten if needed

     Ghana's central bank left its policy rate steady at 16.0 percent but said it would not "hesitate to take immediate and decisive policy actions including on a tighter monetary policy stance, should these risks materialize and threaten to dislodge the disinflation process."
     The Bank of Ghana (BOG), which has been in a monetary easing cycle since November 2016, said its monetary policy stance is still relatively tight and real interest rates in Ghana are comparatively high but there are risks to its outlook for inflation from the depreciation of the cedi.
     After BOG cut its rate by another 100 basis points in late January, the cedi fell around 11 percent in February through mid-March, with BOG attributing this to seasonal pressures on the back of foreign exchange demand by importers and corporates, and sentiment over the economic outlook after the completion of the IMF-supported program and its implication for the next election cycle.
     The cedi was trading at 5.35 to the U.S. dollar today, down 9 percent this year.
      Although the full pass through of this depreciation to inflation has yet to be assessed, BOG noted the overshooting of the exchange rate had corrected to 5.2 percent at the end of March compared with 8 percent as of March 19, and is of the view that a slowing pace of disinflation and upside risks to the outlook for inflation are not enough to dislodge inflation expectations.
      Since November 2016 BOG has cut its key rate by 10 percentage points as inflation has steadily declined.
     Ghana's inflation rate rose to 9.2 percent in February from 9.0 percent in January but this is well down from over 19 percent in March 2016, helped by the tight monetary policy stance, and inflation is still within BOG's medium-term target band and inflation expectations remain well-anchored.
    Ghana's economy remains relatively strong, BOG said, adding the negative output gap seems to be closing at a relatively modest pace and 2018 growth is projected at 5.6 percent after average growth of 6.1 percent in the first three quarters, with 2018 non-oil output growing at 5.8 percent.
     For 2019 growth is projected to rise to 7.6 percent, with the composite index of economic activity showing growth of 3.2 percent in January, up from 2.4 percent in December.
     Helped by slightly higher crude oil and gold prices amidst lower cocoa prices - Ghana's three main exports - Ghana's trade surplus improved to 1.3 percent of GDP in the first quarter from 1.1 percent in the same period last year, leading to a 0.3 percent surplus in the current account.
     Together with inflows from Ghana's $3 billion Eurobond in March, the balance of payments is estimated to show a surplus of some US$3.135 billion, or 4.6 percent of GDP, for the first quarter. Excluding the Eurobond proceeds, the surplus is seen at $449 million.

   
   
       The Bank of Ghana released the following statement:

1. Ladies and Gentlemen, welcome to the press briefing of the 87th regular meeting of the Monetary Policy Committee (MPC). We present the highlights of recent economic developments that shaped the Committee's view of the outlook and informed its decision on the stance of monetary policy going forward.
2. Global economic expansion moderated at the end of 2018, weighed down by policy uncertainty, weakening financial market sentiments and concerns about China’s growth outlook. In Emerging Markets and Frontier Economies, the growth outturn was mixed. While economic activity in China and India remained relatively strong, growth contracted in Argentina and Turkey, reflecting the adverse effects of the recent financial turmoil triggered by last year’s strengthening of the US dollar and other geo-political factors. Early indications for the first quarter of 2019 point to a further weakening of global growth, amid uncertainty about resolution of trade tensions, and lingering challenges associated with the Brexit negotiations.
3. Global inflation was relatively stable in 2018. In advanced economies, headline inflation was largely contained as a result of easing energy prices, while core inflation remained subdued. Among emerging market economies, inflation was fairly anchored, partly reflecting recent declines in international crude oil prices. Looking ahead, forecasts show that inflationary pressures are expected to remain contained, influenced by moderation in wage growth and concerns about the health of the global economy.
4. Monetary policy has remained broadly accommodative in advanced economies. Concerns about weakening growth in the United States, and partially muted inflation pressures, have led to a revision to the Fed’s monetary policy forward guidance, signalling a pause in further interest rate hikes. As slower growth concerns mount, other central banks have held back on further tightening of their monetary policy stance. These developments may moderate the impact of the earlier tightening of financing conditions on emerging and frontier markets, especially in those with relatively strong macro fundamentals.
   5. On the domestic front, growth remains relatively strong and the negative output gap seems to be closing, although at a relatively modest pace. Overall GDP growth for 2018 is projected at 5.6 percent, while non-oil GDP is projected to expand at 5.8 percent. With an average growth of 6.1 percent for the first three quarters of 2018, the broad expectation is that the annual target of 5.6 percent will be realized. For 2019, GDP growth is projected at 7.6 percent.
   6. The pace of economic activity, captured by the Bank’s updatedComposite Index of Economic Activity (CIEA) remained strong, recording an annual growth of 3.2 percent in January 2019, up from 2.4 percent in December 2018. In the same period of 2018, the CIEA registered a 3.6 percent growth. The increase in January was mainly driven by growth in Domestic VAT, Industrial Consumption of Electricity, Port Activity and Imports. Latest results from surveys conducted by the Bank of Ghana in February 2019 show an improvement in consumer confidence even though recent depreciation in the currency affected business sentiments.
   7. Two inflation readings released by the Ghana Statistical Service since the January MPC meeting showed inflation still within the medium- term target band. Inflation decelerated in January to 9.0 percent, from 9.4 percent in December 2018, but inched up to 9.2 percent in February 2019 driven by increases in non-food inflation. Since the last quarter of 2018, inflation has oscillated within a band of 9.0 - 9.5 percent, underpinned by a relatively tight monetary policy stance. Underlying inflationary pressures, as measured by the Bank’s coreinflation have continued to ease and inflation expectations remain well-anchored.
      8. Ladies and Gentlemen, despite these very strong fundamentals, the cedi came under pressure against the major international currencies in February and March 2019, reflecting episodic depreciation similar to what we experienced in May-June 2018. By March 19, 2019, the cedi’s depreciation had peaked at 8.0 percent, compared to a marginal depreciation of 0.02 percent in the same period of 2018.
      9. A confluence of factors accounted for the depreciation in the first quarter of 2019. First, seasonal pressures that recur in the first quarter of every year on the back of foreign exchange demand by importers and corporates to pay off their fourth quarter imports, as well as repatriate profits and dividends. This, coupled with sentiments over the economic outlook after the completion of the IMF-supported ECF programme and its implications for the next election cycle, fuelled pressures on the foreign exchange market.
      10. On the international commodities market, prices of Ghana’s threemain exports — oil, gold and cocoa — turned out mixed. Provisional estimates in the year to March 2019 suggest prices for crude oil edged higher. International benchmark crude oil price rose by about 12.0 percent in Q1 2019 to an average of US$67.43 per barrel. Supply cuts, led by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, coupled with oil sanctions on Venezuela and Iran, contributed to the rally in prices. On average, prices of gold firmed up by 5.5 percent to settle at US$1,320.0 per fine ounce. This was supported by a marginal retreat in the US dollar and affirmation that the Federal Reserve would stick to its dovish stance on monetary policy. Cocoa prices however eased by some 5.1 percent from the average of US$2,199 per tonne traded in January 2019. This was attributed to improving weather outlook in West Africa which has boosted supply expectations of cocoa.
      11. These price developments, alongside fairly improved production levels, especially in crude oil, translated to a provisional trade surplus of US$899.0 million (1.3% of GDP) for the first quarter of 2019, compared with a surplus of US$724.5 million (1.1% of GDP) in the same period of last year. This trade surplus translated into a current account surplus of US$194.5 million (0.3% of GDP) in the first quarter of 2019. The projected current account surplus for the first quarter of 2019, together with the inflows into the capital and financial account, driven mainly by the March 2019 Eurobond will result in a provisional overall balance of payments surplus of some US$3,135.0 million (4.6% of GDP) for the first quarter of 2019. Excluding the proceeds from the Eurobond, the first quarter overall balance surplus is estimated at US$449.0 million, compared with a deficit of US$614 million (0.9% of GDP) same time in 2018. Gross International Reserves (GIR) of the Bank of Ghana rose significantly from US$7.0 billion (equivalent to 3.6 months of import cover) at the end of December 2018 to US$9.9 billion (equivalent to 5.0 months of import cover) as at end- March 2019, mainly reflecting the Eurobond inflows.
          12. Ladies and Gentlemen, provisional fiscal data for January 2019 indicated an overall deficit (on cash basis) of 0.8 percent of GDP against the target of 0.7 percent. Total revenue and grants amounted to GH¢3.1 billion compared with the programmed target of GH¢3.8 billion, mainly due to shortfalls in international trade taxes. On year- on-year basis, the revenue outturn was up by 14.8 percent. Total expenditures was GH¢5.9 billion, marginally below the target of GH¢6.1 billion, and signalling a 13.0 percent year-on-year growth. The deficit was financed mainly from domestic sources which constituted about 89.0 percent of total financing, alongside a primary deficit of 0.3 percent of GDP compared to a targeted deficit of 0.1 percent of GDP.
          13. Data on the implementation of the budget for the first quarter shows an elevated financing of the budget deficit relative to target. This suggests continued challenges with revenue mobilization.
          14. The stock of public debt was 57.98 percent of GDP (GH¢173.2 billion) at the end of 2018 compared with 55.6 percent of GDP (GH¢142.6 billion) at the end 2017. Of the total debt stock, GH¢9.6 billion (or 3.2% of GDP) represented bonds issued to protect depositors’ funds. The external debt component was GH¢86.2 billion with a share of 49.7 percent in the total debt. Proceeds from the recent Eurobond issuance will add some 3.9 percent of GDP to the debt stock.
          15. Growth in broad money (M2+) picked up in the first two months of 2019, partly reflecting base drift effects arising from the banking sector clean-up exercise. Annual growth M2+ was therefore reported at 22.4 percent at end-February 2019 compared to 12.2 percent in the same period of 2018. The increased pace of growth in total liquidity mainly reflected expansion in Net Domestic Assets, moderated by sharp contraction in the Net Foreign Assets. Annual growth in Reserve Money however slowed to 9.3 percent in February 2019 compared with 22.7 percent annual growth in the same period of last year.
              16. Private sector credit growth has gained some momentum stemming from improved liquidity position of the banks on the back of the recapitalization exercise. Annual growth in private sector credit was 21.1 percent in February 2019, compared with 2.4 percent growth in the same period of 2018. In real terms, private sector credit expanded by 10.9 percent.
              17. Developments in the money market generally indicated upward trends in interest rates on the Government instruments, reflecting a heavy reliance on domestic sources of financing prior to the issuance of the Eurobond. The 91-day Treasury bill rate moved up to 14.7 percent in February 2019 from 13.3 percent a year ago. Similarly, the 182-day instrument increased to 15.1 percent from 14.9 percent. Rates on the secondary bond market have also increased significantly, with yields on the 7-year, 10-year, and 15-year bonds edging up to 21.0, 21.1 and 21.5 percent in February 2019, from 15.5, 15.5 and 15.9 percent respectively a year ago.
              18. The weighted average interbank lending rate, that is, the rate at which commercial banks lend to each other, however, declined to 15.6 percent in February 2019 from 18.3 percent same period last year, in line with the monetary policy rate. Similarly, average lending rates of banks also declined to 27.8 percent from 29.3 percent over the same comparative periods.
              19. An assessment of the banking sector shows that the recently recapitalized banking sector is profitable, liquid and solvent exhibiting strong growth prospects in the outlook. In the first two months of 2019, the banking sector posted a stronger after-tax income. Total assets stood at GH¢108.9 billion, representing an annual growth of 14.5 percent in the year to end-February 2019. The growth in total assets was funded mainly from increased deposits and equity injection from the recapitalization exercise.
                  20. Key financial soundness indicators of the industry have also improved, with the Capital Adequacy Ratio (CAR) at 21.7 percent in February 2019, significantly higher than the prudential requirement of 10.0percent. The improved solvency enhances the banking sector’scapacity to deepen financial intermediation and strengthens banks’resilience to shocks going forward. Also, profitability ratios improved while liquidity measures remain broadly adequate. The Non- Performing Loans (NPL) ratio has declined from 21.6 percent in February 2018 to 18.2 percent in February 2019, signalling somemoderation in the industry’s exposure to credit risk. The on-going write-off policy and strengthening of bank’s risk management practices is expected to further impact positively on the industry’sNPLs going forward.

                  Summary and Outlook

                  21. In sum, the Committee observed that global growth has moderated amid weak growth in the Eurozone, continued trade policy uncertainty,concerns about China’s growth outlook, and lingering Brexitnegotiations. Global inflation appears subdued and interest rates, which were expected to rise faster in earlier projections, are now expected to rise more slowly, accentuated by the US Fed’s forwardguidance to pause its hiking cycle on concerns about global growth prospects. This dovish stance is favourable for global financial conditions with positive implications for emerging market and frontier economies in the near-term as investors look for higher yields. These developments could impact Ghana in many directions. While the slower growth could adversely impact commodity prices with implications on the trade account, the improved financing conditions could support the balance of payments and help build strong buffers in the near-term.
                  22. On the domestic front, the Committee noted that growth remains strong with the current negative output gap closing but at a moderated pace. The medium-term outlook for growth is strong with the preparation of new oil wells including those of AKER ENERGY which has submitted a $4.4 billion plan for developing an offshore field, the re-opening of operations at the Obuasi mine, and the implementation of growth-oriented government initiatives. These are all expected to boost medium-term growth prospects.
                      23. The Committee viewed the external sector position as strong from continued trade surplus outturn in the first quarter of 2019, as the current account deficit continues to narrow. The Gross international reserves position has improved and should provide cushion to the Cedi, which is already making some considerable gains against all themajor currencies, as sentiments wane. The overshooting of the Cedi’sexchange rate to a depreciation of 8.0 percent as of March 19, 2019 has corrected to 5.2 percent at the end of March.
                      24. The Committee was of the view that the pace of disinflation has slowed somewhat. While headline inflation remains within the medium-term target band, the latest forecast shows some upside risks in the outlook but not enough to dislodge inflation expectations. Though the exchange rate pressures have moderated significantly, the full pass through of recent depreciation to inflation remains to be assessed.
                      25. The Committee noted the successful conclusion of Ghana’s ECFprogramme with the IMF, and the need to remain steadfast in implementation of prudent policies to anchor the hard-earned stability in macroeconomic conditions. In this respect, the Committee observed that there were risks to the outlook which would have to be monitored very closely. Overcoming these risks would require vigilance and time consistent policy actions. For example, in the energy sector, large foreign exchange payments for excess capacity associated with the‘Take or Pay’ Power Purchase Agreements which has contributed to higher demand for foreign exchange will have to be managed urgently. Also, the vulnerability associated with high non-resident holdings of domestic debt which poses significant risks to the fiscal consolidation process, debt dynamics, and the Bank of Ghana’sefforts at building reserve buffers, should be addressed.
                      26. The Committee was of the view that the monetary policy stance is relatively tight and real interest rates in Ghana are comparatively high. In the circumstances, the Monetary Policy Committee has decided to keep the policy rate unchanged at 16 percent.
                          27. The Committee will closely monitor developments in the coming months and will not hesitate to take immediate and decisive policy actions including on a tighter monetary policy stance, should these risks materialize and threaten to dislodge the disinflation process.

                          
                          

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