Ghana Cedi face risk of further weakening in 2012

…economic growth estimated to slow to 8.5% from 14.1%

The Ghanaian Cedi is expected to weaken further in 2012.  Analysts at Renaissance Capital expect increase in election spending to lead to a weaker Ghana Cedi in 2012. In an analyst note sent to the media, including this blog, the Russian based investment firm declares that “In three of the five democratic elections held since the end of military rule in 1992, the budget deficit widened significantly in an election year. There is thus a risk of strong monetary growth in 2012, which would be negative for the cedi.”

Ghana's President-John Atta Mills

The cedi depreciated 10% against the dollar in 2011. The depreciation in the Cedi led to a negative growth in manufacturing in 2011 by 7.9%   compared with growth of 4.1% in the previous year. Also the trade sector, another key sector in Ghana’s economy contracted by 1.1% within the same period compared to a strong growth of 14.1% in 2010. Both sectors are highly dependent on imported input and the drop in the Cedi resulted in an increase in the cost of imported inputs and tradable consumer goods.

The risk is that if the Cedi weakens further in 2012 activity in manufacturing and trade could remain sluggish in 2012 putting pressure on inflation and job growth. It could also make imported consumption goods more attractive for Ghanaians. Consumption goods currently make up 19 per cent of Ghanaian imports. The manufacturing and Trade sectors make up 12.4 per cent of Ghana’s gross domestic product (GDP).

Not all sectors of the Ghanaian economy suffered a decline in 2012. Besides the oil sector, which was the fastest growing in 2011, the fastest growing non-oil sectors were business services and construction in 2011. Non-oil growth in 2011 was driven by crop production (including cocoa), construction, transport and storage, and business services.  The growth of the construction, transport and storage sector and the business services sectors is said to be driven by the growth in Ghana’s new oil sector.

The weakening of the Ghana Cedi will however be prevented if the Ghanaian government is able to stick to its plans to cut domestic borrowing by 30% in 2012 to GHS1.67bn ($0.97bn). If is this is achieved, the expectation is a softer growth in money supply in 2012 which will be good for a stronger or stable cedi in 2012.

Ghana’s economic growth is predicted to slow to 8.5% in 2012, compared to an estimated growth rate of 14.1% 2011. Excluding the mining and quarrying sector, which other than being dominated by oil production includes gold mining, the economy grew 7.2% in 2011.

The upside however is that oil production has not yet peaked according to analysts.  Oil production is only likely to peak at 120,000 b/d in 2013, analysts expect that the mining and quarrying sector’s momentum will continue in 2012, although at a slower pace than in 2011. Growth in the non-oil sector is expected to be driven by construction activity, business services and the transport and storage sector.