Economy faces capital-flight risk

The International Monetary Fund (IMF) has named Ghana among African “frontier markets” that face rising vulnerability to international capital flow reversals as foreign investors boost their holdings in domestic debt and equity markets.

The Fund said there’s been a recent surge in foreign direct investment (FDI) and portfolio flows into sub-Saharan African economies, with Ghana, Nigeria and Zambia among the main beneficiaries.

“Although these increased foreign capital inflows may supplement domestic financing of investment, they also pose challenges,” said the IMF in its twice-yearly regional economic outlook report for sub-Saharan Africa.

Until now, the region’s frontier markets -- among which are also included Kenya, Mauritius and Senegal -- have largely been spared the turbulence in financial markets that other emerging economies have suffered, “but there is still the risk that, in the future, capital flow volatility may overwhelm the relatively shallow financial markets [of these countries] and test the capacity of macroeconomic policies to adjust,” the Fund stated.

In the particular case of Ghana, average private flows -- combining FDI, portfolio and other investments -- jumped from negative 3.1 percent of GDP between 2000 and 2007 to 7.3 percent of GDP between 2010 and 2012. A noticeable trend is that government has increased borrowing from foreign investors through larger sales of three- and five-year bonds in the domestic market. This year, the first seven-year bond was sold on the domestic market.

Ghana’s yields have been very attractive; and from a share of almost zero in 2005, foreigners now hold about one-third of domestic government debt. According to the IMF, this increased participation of foreigners in the government debt market could be a source of vulnerability for the country.

“Though the secondary market is rather illiquid, an early redemption or purchase of not-yet-matured three-year and five-year bonds is possible,” said the Fund. “This poses risk to international reserve holdings, which have fallen below the estimate of the optimal reserve in 2012.”

In July, government sold the country’s second 10-year Eurobond on the international market, raising US$1billion at a yield of 8 percent, which many analysts felt was a premium -- given that other African countries, including Nigeria, Rwanda and Zambia, had sold debt at lower yields in the previous 12 months.

The country’s policymakers hailed the bond, which was oversubscribed by more than 100 percent, as an affirmation of investor confidence in the economy. But the fact that the yield was higher and the rate of oversubscription lower than in other African countries that tapped international capital earlier in the year is a sign that foreign investors are sensitive to Ghana’s deteriorating fiscal and current account positions, the IMF said.

These weak fiscal and external positions expose Ghana more to the effects of a shift in foreigners’ appetite for risky assets compared to other frontier markets.

The Fund said all the countries at risk must improve data gathering on capital flows to enable early detection of risks, and strengthen macroeconomic management to build enough buffers to withstand a crisis.

Few countries in sub-Saharan Africa face a more acute challenge of macroeconomic rebalancing than Ghana, with government looking less likely to reach its 9 percent of GDP budget deficit target for 2013 as spending on wages continues to spiral out of control. The IMF has said the gap is more likely to be 10 percent of GDP.