Ghana’s election is a question of prudence vrs continuity – RenCap

Elections in Ghana tend to arouse less uncertainty than those in most of sub-Saharan Africa, due to its relatively stable political environment and mature democracy. This was affirmed by the smooth constitutional transfer of power following President John Atta Mills’s death in July, to his former vice-president, John Dramani Mahama.

However, a tight presidential election on December 7 – like that of 2008 – would increase the political risks. And there is a lot a stake from the ramping up of oil production to dealings with the IMF.

If the result is disputed, the situation is unlikely to deteriorate into protracted violent clashes between the two candidates’ supporters, and is more likely to be settled by the courts.

Local and international pollsters say Mahama of the ruling National Democratic Congress (NDC) has a slight lead over his main rival, Nana Akufo-Addo of the New Patriotic Party (NPP). However, the 2008 elections revealed that if there is a second-round run-off, polling can easily switch between the two rounds, implying the vote is likely to be close-run. In 2008, Atta Mills secured 50.2 per cent of the vote, to Akufo-Addo’s 49.8 per cent.

History suggests the NPP is likely to be more fiscally prudent. A second-term NDC-government would likely seek to retain subsidies, which the IMF thinks are expensive, and block privatisation, in line with its social-democratic credentials. Therefore an NDC government can be expected to practice less fiscal restraint, implying higher inflation than an NPP administration.

History affirms this: in the 12 years the NDC has been in power, post-military rule, the budget deficit averaged 7.6 per cent of GDP, compared with 4.9 per cent in the eight years the NPP was in office.

Another area of difference which may impact economic policy is Ghana’s future engagement with the IMF. The three-year IMF programme ends in 2012, and there is uncertainty about whether the country will have a new IMF programme post-election, because the opposition NPP has said it previously moved away from requiring IMF support during its 2004-08 term. If the NPP wins the election, there is a small risk that the IMF may not be re-engaged. We think the NPP is likely to opt for a watered-down programme, rather than no programme, if it wins the election.

Ghana’s oil production increases the political stakes. The political party that wins the presidency and controls the National Assembly receives and manages billions of dollars of oil and gas receipts, giving it a stronger position to compensate its supporters with jobs, contracts and civil-service positions. The delayed peaking of Ghana’s oil production, at 120k b/d, implies that the NDC administration has yet to realise the full potential of governing an oil-producing country.

Oil production has actually declined during 2012 (by 15 per cent year-on-year in Q2 2012, to 59,200 b/d), due to maintenance work at several wells. Ghana’s current account deficit widened to 6.4 per cent of GDP in the first half of 2012, from 2.7 per cent a year earlier, partly due to the fact that oil export volumes were still too low to have a significant positive impact. Although production is reported to have recovered to around 80,000 b/d in the third quarter of 2012, it remains some way off its peak.

The NPP has criticised the NDC for frequent power cuts, the Tema oil refinery crisis, corruption and failing to optimise the economic potential of new oil and gas production. The underperformance of the industrial sector in 2012, which saw a sharp slowdown in growth in Q2 to 4.5 per cent year on year compared to 39 per cent in 2Q11, was not just due to lower oil production, but also to near-zero manufacturing growth over the period, which may reflect Tema’s shutdown for most of the quarter.

Frequent interruptions to Tema’s operations and common power blackouts have not just undermined GDP growth, but also confidence in the NDC’s ability to manage state companies. In addition, the NDC’s oil and gas credentials are being questioned following claims by the NPP that a delayed gas processing plant, being built by China’s Sinopec, is significantly overpriced.

The NPP has been criticised by the NDC for being out of touch with the urban and rural poor. The NPP’s promise to provide universal free education, similar to Kenya and Uganda (where education is the biggest budget item) is a populist measure that may be the opposition party’s way of redressing this view, although it would have clear spending consequences.

Post-election, an NDC win would signal policy continuity, which would be especially positive for oil and gas investors. This would suit Chinese investors in particular, as it would reduce the risk of deals like the Sinopec gas processing plant deal being reviewed, as happened to Vodafone’s 2008 acquisition of Ghana Telecom.

While an NPP win may create initial uncertainty, in the medium term the NPP may be more effective at redressing inefficiencies in the public utilities sector; and if history is anything to go by, it may be more fiscally prudent.

An NDC win would be postive for the cedi in the near term, but may imply more borrowing for the budget deficit, which would be negative for debt sustainability, and higher interest rates in the medium term.

By Yvonne Mhango
Sub-Saharan Africa Economist at Renaissance Capital

Source: FT.com