Rand Merchant Bank (RMB), the Corporate and Investment Banking arm of First National Bank (FNB), projects Ghana’s economy to rebound strongly at 4.2% in 2021.

According to RMB, a combination of exceptional services sector growth, a faster than expected rate of vaccinations, and higher than expected oil prices are expected to drive economic growth in Ghana to pre-COVID-19 levels.

“Recovery from the COVID-19 pandemic is dependent on strengthening the sectors that can quickly stabilize the human capital and then, further mobilize the resources relevant to stimulating the economy. Surely the gains of the oil market, mining and other essential services will benefit Ghana greatly”.

“We expect growth at 4.2% in 2021 with the services sector, to recoup some of the losses made during the pandemic”.

However, Neville Mandimika, Economist and Fixed Income Analyst at RMB, cautioned that delays in vaccine roll-out and the threat of another lockdown are likely to dampen the recovery. In the worst case scenario, growth is expected to remain low at 2.0% this year.

Sluggish growth in 2020

Having avoided a recession in 2020, the economy is expected to continue growing as exports increase and consumer activity improves. The current projections come against the backdrop of a 3.3% growth y/y in the fourth quarter of 2020 and a 3.1% growth recorded in the first quarter of 2021.

“The economy recorded 0.4% full-year growth in 2020, which was softer than our expectations, but a relatively brief lockdown of three weeks helped in avoiding a recession”.
Mandimika

Most sectors registered growth for the year but lacklustre performance in the hotel and restaurant sector (3% of GDP) nearly offset the notable gains in the other sectors, says RMB.

The oil sector contracted 7.4% last year compared to the 15% growth in 2019 while mining and quarrying (mainly gold) registered an 11% contraction, with both suffering from drops in production and weaker resources prices.

Moreover, RMB highlighted that Information and Communications Sectors registered 23%, benefiting from people working from home and cocoa 33%.

Inflationary Expectations

Meanwhile, RMB expects inflation to increase as economic activity picks up, with the inflation rate at 10.5%, marginally above the Bank of Ghana’s target band. Should this happened, the Bank of Ghana is then expected to hike rates to anchor inflation expectations.

“However, the base case is that inflation would moderate to 9.0%, which would then mean no interest rate cuts in 2021 as the economy shows signs of improvement while inflation remains contained” .
Mandimika

Nevertheless, RMB expects inflation to ease to the lower end of the inflation target band of 6% – 10% in the worst case scenario when there is lack of aggregate demand.

Furthermore, improved economic growth is forecast to boost revenue generation but the deficit remains outside the threshold of minus 5% of GDP. RMB indicated that as economic activity picks up and expenditure is contained, the fiscal deficit narrows from 2020 levels to 9.6%.

Moreover, RMB indicated that the sizable Eurobond issuance during 2021 bolstered the cedi. However, the twin deficits continue to exert moderate pressure on the currency, but the pace of depreciation is capped due to the sizeable portfolio inflows Ghana is expected to enjoy in 2021.