Ghana’s current account deficit to widen to 2.9% of GDP in 2022 – Fitch Solutions
At Fitch Solutions, we forecast that Ghana’s current account deficit will widen, albeit modestly, from an estimated 2.6% of GDP in 2021 to 2.9% in 2022 as rising vaccination rates boost household confidence and demand for imports, narrowing the country’s goods trade surplus.
That said, this will be partially offset by an uptick in remittances, increasing the secondary income account surplus, while stronger tourism will see the country’s services trade deficit narrow.
Indeed, our forecast implies that while the country’s current account deficit will expand in 2022, it will remain small compared to Ghana’s five (-3.4% of GDP) and 10 year (-5.8%) pre-pandemic averages.
Meanwhile, we expect increased financial account inflows as a result of increased investment in gold mining, and an uptick in portfolio inflows, will continue to cover the widening of the current account deficit in the coming quarters, ensuring Ghana’s external position remains stable in the years ahead.
Current Account Deficit To Widen In 2022
Ghana – Current Account Balance
e/f = Fitch Solutions estimate/forecast. Source: Bank of Ghana, Fitch Solutions
We expect the goods trade surplus to shrink in 2022, to USD1.0bn from USD1.8bn in 2021, on the back of rising consumer-driven import growth while falling oil and cocoa production will temper export growth. Our Oil & Gas team forecast a 1.9% decline in oil production volumes in 2022, as a result of recent low exploration activity and continued investor uncertainty following very low prices in 2020 stemming from the Covid-19 pandemic.
This will keep production below pre-pandemic levels, and which will subsequently weigh on goods exports – oil represented 23.2% of total exports in 2020. Moreover, our Agribusiness team forecast a 3.5% decline in cocoa production, largely as a result of base effects, as well as structural issues such as such as labour problems and fragmentation, with cocoa swollen shoot virus presenting a further downside risk to forecasts.
As cocoa exports made up 16.6% of exports in 2020, this will also weigh on export growth. Although we anticipate stronger gold production and prices in the coming year, this will not be enough to offset the aforementioned factors. Indeed, we forecast export growth will come in at 9.4% in 2022, below the 2010-19 average of 12.4%.
Stagnating Production To Weigh On Oil Exports
Ghana – Oil Production & Global – Oil Price
e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions
Meanwhile, import growth will surpass its pre-crisis 10 year average. While Ghana’s vaccine rollout remains slow, with only 9.9% of the population have been fully vaccinated, as Ghana obtains more vaccines through COVAX and the African Vaccine Acquisition Trust we expect that Covid-19 related social distancing restrictions will be loosened.
In turn, this will result in a rebound in domestic demand, and increase demand for consumer imports – as we expect private consumption growth of 4.7% in 2022, up from 3.8% in 2021. Moreover, our Infrastructure team expect construction industry growth of 7.2% in 2022, which will increase demand for imports of capital goods.
Subsequently, we expect goods imports to rise by 16.5% in 2022, which will more than offset the forecast rise in exports, widening the current account deficit.
Trade Surplus To Narrow In 2022
Ghana – Merchandise Trade, USDmn
Source: Bank of Ghana, Fitch Solutions
That said, the widening of the external account position will be tempered by stronger tourist arrivals, narrowing the services trade deficit. We forecast that service exports will increase by 25.1% in 2022, as headwinds to global travel and tourism fade. While we also anticipate increased demand for imported business and financial services as a result of the continued recovery of the domestic economy, this will still see the services deficit narrow from USD4.8bn in 2021 to USD4.3bn in 2022.
We also expect that the secondary income balance will increase, as economic activity in developed markets continues to strengthen, which will support the incomes of Ghanaians living abroad, and by extension foreign remittances to Ghana. The World Bank estimates that foreign remittances to Ghana increased by 25.0% in 2021, as the global economy recovered, and we expect this trend to continue in 2022 as developed market growth continues, and as Ghanaians continue to move to developed markets as a result of the reopening of borders.
Financial account inflows will cover Ghana’s modestly wider current account deficit. We expect increased direct investment in the coming quarters, as gold mining companies such as Gold Fields and Newmont Goldcorp invest in production capacity following recent elevated gold prices – which averaged USD1799.4/oz in 2021, significantly higher than the 2015-19 average of USD1266.0/oz.
Meanwhile, portfolio inflows will remain robust in 2022 on the back of an expected 50 basis points of rate hikes, to 15.00%, by the central bank, which will improve Ghana’s real interest rate differential with developed markets. A steady stockpile of foreign reserves – we forecast that Ghana’s stock of foreign reserves will rise from 4.5 months of import cover in 2021 to 4.6 months in 2022, and further to 4.7 months in 2023 – bolstered by IMF Special Drawing Rights – will ensure that the country’s external position will remain stable.
Foreign Reserves To See Stable Growth
Ghana – Foreign Reserves, Excluding Gold, Months Of Import Cover
e/f = Fitch Solutions estimate/forecast. Source: Bank of Ghana, Fitch Solutions
