Coronavirus: Government's short term revenue under pressure

Government’s revenues in the short term are most likely going to be hit by the fallout effects of the new Coronavirus outbreak, which has plagued the world’s second-largest economy and subsequently, several other countries as well.

Although Ghana is yet to report any cases of the coronavirus, which has immensely affected China, oil export revenue and import duty revenue are the most likely to be hard hit given the fallout on some other sectors of the global economy, particularly on global oil prices and the volume of imports into the country.

On Monday, February 3, 2020, oil prices on the international market fell to nearly US$ 56 per barrel, the lowest in a year. Prices dropped by more than a US$ 1 earlier in the session to US$ 55.42, the lowest since January 2019.

This has largely been due to worries about lower demand in the world’s top crude oil importer China, after the coronavirus outbreak spread from there to about 20 other countries.

On Tuesday afternoon, February 4, 2020, Brent crude was trading at US$ 54.83 a barrel.

Analysts on the international market indicate the current travel restrictions and the extended shutdown of large parts of the Chinese industrial sector have weighed on oil demand and this is reflected in the weakness that global oil markets are seeing in the ICE Brent time spreads.

Goldman Sachs said the coronavirus outbreak will create a large demand shock in the global oil market and keep volatility in spot prices elevated.

Crucially, oil prices have currently fallen below the Ghana government’s own projected benchmark price for this year. Government in the 2020 budget projected the crude oil benchmark price for 2020 at US$ 58.66 per barrel, down from US$ 66.76 per barrel for 2019.

The 2020 Benchmark Revenue (BR) from crude oil output is 70.2 million barrels (192,336 barrels of oil per day), based on a three-year simple average of each producing oilfield’s actual and projected outputs from 2018,2019 and 2020.

The projected total petroleum revenue for 2020 is thus US$ 1,150.84 Million, but the immediate effects of the coronavirus are putting this target in jeopardy.

Imports and the Cedi

On Monday, the Ghana cedi was named as the world’s best-performing currency against the dollar, extending its advance. However, this has largely been due to the effects of the coronavirus in China, which has been the major exporting country for various products into Ghana, leading to a cut back in both travel and trade and hence reducing demand for foreign currency from Ghanaian importers.

Conversely though, the decline in imports will certainly affect government’s revenue in the short-term, especially in this first quarter by reducing its income from import duties.

The currency of the world’s second-biggest cocoa producer has strengthened by 3.9 percent so far in 2020, the most among more than 140 currencies tracked by Bloomberg, a turnaround from last year, when it weakened by 13% over the corresponding period.

Nevertheless, government is on a road show to issue US$ 3 billion in Eurobonds. This will shore up the country’s external reserves hence strengthening the local currency further, as well as the support for the cedi’s exchange value provided by the on-going forward forex auctions conducted by the Bank of Ghana which are reducing uncertainty in the local forex market and consequently, adverse speculative currency trading.