May 2014 Financial News

Republic Bank acquisition...Ghana's economy weaker than T&T's

May 01, 2014

Should the customers and shareholders of Republic Bank Ltd (RBL), and unit holders in the Clico Investment Fund (which is backed by a 25 per cent stake in RBL) be concerned that the Port-of-Spainheadquartered Caribbean wide bank may be on the cusp of fully taking over HFC Bank Ghana?

In a Business Guardian comparison of the two economies, with a 2012 (latest available) nominal gross domestic product (GDP) of US$40.7 billion, Ghana appears to be a larger economy than T&T, which up to 2013, reported a US$25.7 billion nominal GDP.

With a larger population at 15 million, Ghana's US$3,316 GDP per capita is a fraction of T&T's US$19,826 GDP per capita.

While T&T reported only 0.2 per cent average real GDP growth over the last nine years, Ghana reported 7.4 per cent.

In its 2014 credit analysis of each country, Moody's Investor Services rates both countries low (L) on economic strength, with T&T having Lwhile Ghana has L+.

Moody's rates T&T Baa1, six notches higher than Ghana, and into investment grade. Ghana is rated B1 and as "highly speculative" in the non-investment grade bracket.

On institutional strength, Ghana is rated low while T&T is rated moderate. Under government effectiveness, T&T's Government is 55.1 per cent effective while Ghana's is 38.4 per cent, Moody's said.

The rule of law is rated slightly better in Ghana at 48 per cent while T&T had 41.7 per cent. Control of corruption is 48.8 per cent in Ghana while it is 41.7 per cent in T&T. Ghana's average rate of inflation over the last nine years was 10.8 per cent while T&T's was 6.6.

Ghana has a negative current account balance to GDP ratio of -12.1 per cent while T&T has a positive 14.3 per cent.

External vulnerability risk: Trinidad

T&T also poses a lower vulnerability risk than Ghana, according to the two Moody's reports. T&T is rated "very low" while Ghana is rated "low."

"We assess T&T’s external vulnerability as ‘very low’ due to the county’s very strong external balance – the current account surplus (having averaged close to 12 per cent of GDP over the last five years) is the second highest among Baa-rated sovereigns and one of the largest in our ratings universe. In addition, it is complemented by healthy net foreign direct investment (FDI) inflows.

Primary external risk for T&T stems from a sustained decline in global commodity prices, Moody's said. Oil and gas benchmark prices for T&T have taken on divergent paths since the global financial crisis – due to the shale gas revolution in North America, natural gas prices in the region are now on par with 2002 levels while oil prices remain elevated, Moody's said.

However, the country’s exposure to gas price volatility is moderated by upstream diversification into petrochemicals, and expected significant investment in the energy sector in the course of the next five years should further strengthen this position. T&T has also made progress in diversifying liquefied natural gas (LNG) exports to markets beyond the United States, the report said.

External vulnerability risk: Ghana

Though it said Ghana's external vulnerability risk score was still, "Low," Moody's began this section by saying: "Ghana’s external vulnerability has increased due to rising current account deficits and a decline in foreign exchange reserves."

It then went on: "We view Ghana’s susceptibility to external vulnerability risk as low. Ghana’s current account deficit widened to an expected -11.9 per cent of GDP in 2013 from -5.3 per cent of GDP in 2011, which, when coupled with high government fiscal deficit, increased Ghana’s vulnerability to external shocks."

The deteriorating current account deficit is mainly the result of two factors:

(1) a deterioration in Ghana’s terms of trade as the price of the country’s main exports have, since the beginning of 2013, either fallen (as seen in the 23 per cent drop in the price of gold) or experienced volatility (in the case of the price of cocoa and oil); and

(2) an increasing import bill, which is expected to have reached 50 per cent of GDP in 2013 due to increasing demand for capital goods for infrastructure and oil sector development, Moody's said.

Although still financed in a large part by FDI, Ghana’s current account FDI coverage has been on a declining trend since 2011, Moody's said. While FDI inflows exceeded the current account deficit in 2011, they fell US$4 billion short in 2012 and are expected to do so again in 2013-14, causing the cedi to depreciate in the absence of strong intervention by the central bank.

This has put pressure on gross international reserves, which, as of the end of third quarter of 2013, only covered 2.9 months of imports, a low level relative to other commodity-exporting countries. Nevertheless, the expected rise in oil and gas exports over the coming years will provide the government with a natural exchange-rate hedge and greater foreign-exchange revenues, Moody's said.

The recommended import cover a country should have is one year. T&T usually has one year, but recently has been struggling to stay above ten months.

The high share of commodity exports does leave Ghana exposed to commodity price movements and protracted commodity price weakness could both reduce exports and dissuade foreign inflows, the report said.

"We see gold prices trending down as global economic performance improves, reducing the attractiveness of gold as a store value. Cocoa and oil prices are structurally sound and we do not anticipate excessive movement in these markets in 2014-15. Oil is expected to overtake gold as the largest export by value for Ghana. The establishment of a sovereign wealth fund will, in the medium term, serve as a fiscal buffer to commodity-price volatility. This fund today holds US$411 million and is set to grow robustly as oil revenues rise," Moody's said. T&T's sovereign wealth fund known as the Heritage and Stabilisation Fund (HSF) has over US$5.1 billion.

Ghana is also susceptible to a sudden stop in foreign financing, the report said. As outlined in its discussion of fiscal strength, portfolio inflows are critical to rolling over medium and long-term domestic debt and replenishing reserves, Moody's said. The rating agency said the presence of political instability in the region, or more idiosyncratic risks such as elevated inflation or a sharp currency depreciation, will adversely affect market liquidity and elevate Ghana’s funding costs.


Source:
ALEEM KHAN
Trinidad Guardian
BG6 | NEWS BUSINESS GUARDIAN www.guardian.co.tt MAY 2014 • WEEK ONE