By Wilfred Agyei
Wilfred Agyei is the Senior Analyst, Corporate Finance & Research at UMB Investment Holdings Ltd. He has progressive experiences in financial markets analysis and reviews, economic, industry, company specific analysis, business valuations, financial due diligence, and forecasting for investment decision making. His economic articles and publications won UMB Stockbrokers the best Research House of the Year in the 2017 Ghana Investment Banking Awards. He was also adjudged the Most Impressive Young Investment Banking Professional of the Year (Silver), and Research Analyst of the Year (Bronze). He is licensed as a Dealer’s representative by the Securities and Exchange Commission Ghana.
The Ghanaian economy is expected to record upbeat growth in 2018, chiefly driven by expansionary economic policies, gradual pickup in commodity prices, as well as a boost in oil and gas production. Renewed investor confidence on the back of improving macroeconomic fundamentals and accommodative business policies being championed by the Ghana Investment Promotion Center is expected to see foreign direct investments surge. Overall, I project GDP to grow at 7.1% in 2018.
INFLATION, POLICY RATE AND INTEREST RATES
With respect to inflation, the expected movement of the base year of the CPI from 2012 to 2017 is in the right direction as this will better reflect the current economic situation. Government has targeted an average inflation rate of 9.8% in 2018. Headline inflation has mainly recorded a downward trend from quarter four of 2016. Some factors that accounted for this include, the relatively slower pace of upward adjustments of fuel and utility prices.
In 2018, if implemented, the proposed reduction in electricity tariffs (residential, non-residential, low voltage, and medium voltage -13%, and high voltage- 14%) will result in decline in production costs across several economic units. This may partly contribute to lowering and stabilizing inflation in 2018.
On the back of the foregoing, I forecast inflation to average between 10.25% -11.01% in 2018.
With inflation rates being lowered and stabilized, the policy rate is also anticipated to see further cuts in 2018, which may drive commercial bank interest rates downward, albeit marginally. In 2017, the government cumulatively reduced the policy rate by 550 basis points from 25.50% to 20%. Barring no inflationary shocks, and considering government’s agenda to drive down interest rates, I expect a cumulative cut of 250 basis points in the policy rate from 20% to 17.5% in 2018.
On the currency market, I expect to see the interplay of the following balancing forces driving the performance of the Cedi; improving export earnings from possible increases in crude production, owing to the ITLOS September 2017 ruling, will continue to support the economy’s liquidity position, and further boost Ghana’s foreign reserves portfolio which is likely to contribute to a fairly stable Cedi.
On the flip side, anticipated hikes in U.S Fed rate in 2018 may tighten global financing conditions which may have downside ripples on the Cedi. Further, speculative activities, as well as demand for hard currencies for imports is not expected to take a turn in 2018.
On the back of the foregoing, the Cedi’s performance in 2017 is not expected to be significantly different in the coming year. I forecast the Cedi’s deprecation rate against the major trading currencies as follows:
United States Dollar: -4.5% to -4.6%
British Pound:-7.9% to -8.5%
Euro: -10.6% to -11.6%
The stock market reflects the performance of the economy; it recorded a bullish run in 2017, chiefly driven by the lower prices at the beginning of 2017, which saw investors rush to take positons for bargain deals, coupled with renewed investor interest, increased risk appetite, low Treasury bill rates as well as overall renewed confidence in the economy. Stocks that have driven trading activity include GCB Bank, Ecobank Ghana, Fan Milk, Standard Chartered Bank, Enterprise Group, and HFC Bank.
For the early months of 2018, the upward run of the market indices is expected to be moderated, with investors awaiting to digest 2017 full year financial results of listed companies before taking positons. Among the drivers of activity in the first quarter of 2018 will be dividend announcements, as well as possible rights and bonus issues by banks due to the increase in the core capital requirements by the Central Bank.