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Business News of Wednesday, 19 September 2007

Source: Robert Ruttmann - Credit Suisse Analyst

Ghana Remains a Trendsetter in Africa

Today, Ghana once again sees itself in the vanguard of a new African renaissance - but very different from the 1950s. This time, the renaissance is less about independence from colonial rule, and more about setting standards in Africa for good governance, macroeconomic stability and poverty reduction. To these pioneering ends, Ghana was the first country to subscribe to the African Peer Review Mechanism, whereby African countries judge each others' democratic progress. It was also the first country in Africa to have its president willingly step down from office in 2000, thus abiding by a constitutional clause prohibiting more than two presidential terms in office.

Macroeconomic Reforms Help Fuel Growth
Political stability has also been accompanied by a growing economy, ushered in by various macroeconomic reforms under the tutelage of the IMF. For example, the Poverty Reduction Strategy implemented during the first half of the current decade has boosted private sector investment, reduced inflation, and cut poverty. Real gross domestic product (GDP) growth rates in Ghana have risen to around 6 percent a year over the last 3 years, up from only 3.4 percent in 2000. Inflation has also dropped to single digits, down from 40 percent in 2000, and the fiscal deficit has steadied in a 3 percent to 5 percent range of GDP. Structural reforms also continue to improve the local business climate in Ghana, which has seen the country climb up the rankings of the World Bank's “Doing Business” report, in which Ghana is now ranked ahead of most other African nations, and even ahead of EU-member state Greece.

Rich in Resources
Looking forward, Ghana's economic and political stability will serve as an abiding foundation for attracting foreign direct investment (FDI) as the country capitalizes on its strong natural resources. Ghana's economy is rich in resources and well diversified, with no extreme dependence on any single crop or mineral. The resource base includes arable land, tropical rainforest, Atlantic fisheries, existing and potential hydroelectric capacity, deposits of gold, diamonds, mangenese, bauxite – and discovered only recently in June and August of 2007, two large submarine oil reserves off the Ghanian coastline. In 2006, these features attracted more than 335 million dollars in FDI inflows, an increase of 133 percent on the previous year. Credit Suisse expects this level to be exceeded in 2007 and 2008, supported by the 50th anniversary independence celebrations, and the African Nations Cup football tournament to be hosted by Ghana in 2008.

Cocoa and Gold Are Biggest Attractions
The development of Ghana's vast natural resources continue to be the biggest attraction for foreign investors. In 2006, Ghana increased its gold production by 10 percent to 2.23 million ounces (1.3 billion dollars in value), making it the tenth largest gold producer in the world. This increase in production was made possible by the opening of two new mines, both of which are owned by foreign companies. Ghana is also rapidly expanding its cocoa production capacity with the help of foreign investors. Cargill Incorporated, a US firm, has built Ghana's fifth cocoa production facility, increasing national cocoa production by 27 percent on the year. This makes Ghana the second biggest cocoa producer in the world, responsible for 20 percent of global production. By 2008, we expect Ghana to process over 300,000 tons of cocoa products, a 200 percent increase over the 100,000 tons processed in 2005.

Oil Discovery Lures More FDIs
Credit Suisse also expects big increases in FDI following the recent discoveries of two large oil reserves off the coast of Ghana by the UK oil company, Tullow Oil. The discoveries amount to 800 million barrels of oil, perhaps more. While this is only about 1 percent of the total African oil reserves, these oil sales will boost economic growth in Ghana once extraction can begin in approximately 5 years. In the meantime, the discoveries will increase FDI as oil companies buy the capital equipment needed to start extraction.

Capital Markets Gain Interest
Apart from FDI inflows, the availability of a capital market infrastructure in Ghana is also an important source of funding for economic growth. At a price-to-earnings ratio for 2007 of 8.35, the Ghana stock market is attractive from a valuation perspective. Nonetheless, with a market capitalization of only 423 million dollars, liquidity remains an obstacle for foreign investors. While this suggests an early stage market, it also points to the substantial scope for expansion of the capital market in the years to come.

A Frontier Market Not Without Risk
Still, despite Ghana's trendsetting status in the African context, an investment in the country would not be without risk. While rich in resources, the country is beset by power shortages causing frequent blackouts. There is also risk of rent seeking activity by foreign firms manipulating the domestic regulatory environment as they extract the country's precious resources, and poverty rates still afflict no less than a third of Ghana's 22 million people. Taking a long term view, however, Ghana represents a story of a frontier market steadily diversifying its economy beyond its domestic base. For an investor with a longer investment horizon, Ghana offers an interesting and potentially lucrative opportunity to participate in the development of a rising frontier market.

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