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Ghana: Great Expectations

With his January 7 inauguration firmly in sight, few would be surprised if President-elect Nana Akufo-Addo chose to take a few more glances, accompanied by some pate scratching, at his pre-election promises. The chief source of tension is likely to revolve around cutting taxes, delivering free secondary education and a “factory” in each of the 216 districts across the country - all while sticking to the IMF’s 3-year $918 million Extended Credit Facility which involves swingeing fiscal consolidation.

The incoming government seems to be pinning much of its hopes on rising hydrocarbon production, primarily via the delayed Tweneboa-Enyenra-Ntomme (TEN) development, and a boost to cocoa output, amidst a broader pickup in commodity export prices including lumber and gold. While the NPP’s pro-business stance, which includes snipping corporation taxes from 25% to 20% and removing import levies on machinery, would normally be welcomed in Washington, it is highly unlikely that the Fund will markedly relax its conditions for support, especially since there were signs of fiscal slippage in the run-up to the December election which put the agreed 2016 deficit of 5.2% of GDP at risk. Look for the NPP to start to dampen down expectations, possibly as soon as next week.The surprisingly handsome victory of the New Patriotic Party over the National Democratic Congress, by a margin of 54% to 44%, owed much to the sub-par economic performance since 2012. However, there are firming signs of improvement. Following a 2016 peak of 19.2% in March, annual headline inflation is now on a downward trend and softened again in November to 15.5%, This partly reflected the relative stability of the Cedi during the year as the IMF programme bolstered policy credibility and we expect the Cedi to end this year close to its current 4.27 per USD. Although inflation remains well above the Bank of Ghana’s 8% target, the improved outlook underpinned the November 50bps cut in the policy rate to 25.5%. Further falls in both inflation and interest rates will boost household spending as well as aggregate output, which rose by a stronger-than-expected 4.0% y/y in Q3 following a downwardly revised 2.3% Q2 print. Along with a policy-driven boost to domestic investment and FDI flows we anticipate GDP to rise by 5.5% this year, up from around 3.7% in 2016, and by around 6% a year y/y through to the next election.

Against this favourable backdrop, which includes twin-deficit gains, the NPP should be able to make a steady start towards its key manifesto pledges. But policy design and sequencing will be critical to maintain and take advantage of the improved fundamentals.

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