Business News of 2014-08-13

Tougher times ahead — AGI

Businesses in the country are holding back on their expansion plans, cutting down investments in their operations and contemplating job cuts in anticipation of tougher economic times in the coming months.

Already, their confidence in the economy has dropped to an all-time low of 22.42 in the second quarter of the year because "signs of recovery do not look immediate."

"What this means is that the dynamics with investments will slow down and we will not expect to see growth in the rest of the year," the President of the Association of Ghana Industries (AGI), Mr James Asare-Adjei, told the GRAPHIC BUSINESS moments after the release of the association's Business Barometer Indicator (BBI).

Reasons for the grim sentiments on the economy are not far-fetched given how badly the economy has performed. Inflation is at a four-year record of 15 per cent, and since the year began, prices of petroleum products have been raised four times. In fact, petrol costs 53 per cent more today than in January, contributing in the general increase in inflation.

The cedi’s performance against the dollar particularly has been disappointing (by almost 30 per cent) which has impacted negatively on working capital of many businesses. For many of them, they had forecasted between GH¢2.1 and GH¢2.5 to the US dollar. However, the cedi has depreciated further to GH¢ 3. 5.

As if that was not enough, the Bank of Ghana’s stern monetary policy stance has led to high interest rates with government paying 25 per cent to borrow for 91 days. The implication for business is that interest rates are around 30 per cent or more depending on the borrower’s risk profile.

These factors, together with the unstable power supply, dampened businesses confidence on the economy, causing them to predict a gloomy future as captured in the BBI.

The Barometer Indicator is an initiative of the AGI used in gauging business confidence while predicting short-term business trends in the economy. Its latest survey of business performance and confidence in the economy showed the sentiments of the business community fell from 90.13 in the first quarter of the year to the current 22.42, making it the lowest since the BBI was introduced in the second quarter of 2009.

The next six months also looked bleak as some 93 per cent of the chief executive officers (CEOs) of businesses interviewed for the survey said the business environment was not likely to improve. That contrasted sharply with the seven per cent who were optimistic of an improved business climate in the second half of the year.

Employment expectations from the business community in the second quarter of the year also worsened by some 15 per cent as over 93 per cent of business owners dismissed chances of hiring new hands in the coming months.

"Basically, business owners are saying that they don't see an end to the current challenges in sight and because of that they don't expect to employ more people. Some of them are even contemplating downsizing and laying off some staff in the next three to six months," Mr Asare-Adjei, who is the Chief Executive Officer (CEO) of the Asadtek Group, explained.

The survey mentioned the cedi depreciation, unstable power supply, taxation and the Bank of Ghana (BoG) measures on foreign exchange usage as the major factors influencing their grim outlook on the economy.

It is instructive to note that this is the first time, since the Business Barometer report was introduced some five years ago, that business leaders are pessimistic that the economy will improve.

General loss of confidence

The grim sentiments from most CEOs in the business climate within the second quarter of the year are consistent with the findings of a similar survey conducted by the Bank of Ghana (BoG) on business confidence in the economy.

The bank's July 2014 Monetary Policy Committee (MPC) report revealed that the Business Confidence Index (BCI), which also gauges the confidence levels of businesses, declined to 82.8 in March this year from the 99.0 recorded in December last year.

The decline was attributed to (anticipate) slowdown in industry growth, sales, revenues and capital outlays arising from exchange rate depreciation and cost of operations.

That steep fall in the value of the cedi had fuelled consistent increases in prices of goods and services in the country, leading to an overall rise in the cost of operations of businesses.

Unilever Ghana Limited, which manufactures consumables for the local and export market, posted a Ghc6.5 million loss in the first half of the year as the cedi depreciation and its attendant consequences lowered demand for the company's products while raising its cost of operations.

However bad that may be, the President of AGI said more businesses would be reporting similar losses in the remaining half of the year should government fail to initiate and implement policies that would ensure immediate turnaround in the economy and the fortunes of businesses in particular.

"The situation is not limited to one company or institution alone; it is an industry-wide issue and so the long-term effect will be that businesses will be reporting losses, and because of that government won't get more corporate taxes and by extension revenues will experience shortfalls - some of these businesses will stop investing and some may even shutdown if the situation does not improve," Mr Asare-Adjei added.

On the concerns that need immediate attention to help restore confidence, he said government should work at creating a stable macroeconomic environment that would make it possible for businesses to plan.

"The whole issue is about lack of economic stability. So, we welcome anything that will help create efficiency in the system and ensure that we get stability," he added.

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