Issue 142 • 4 July, 2008

Ghana punches its financial weight, opens up for projects ahead of oil

Last October’s $750m Eurobond, the first such issue in sub-Saharan Africa outside South Africa, was heavily oversubscribed; so was a $200m five-year bond for Ghana Telecommunications, raised only three weeks later. These issues came little more than three years after Ghana had graduated, in July 2004, under the Heavily Indebted Poor Countries debt forgiveness initiative. Since the heady days of those Q4 07 issues the sub-prime crisis has kicked in, with signs that even apparently “immune” emerging markets could now face problems raising funds. But Ghana’s financial sector transformation continues to attract an impressive roster of bankers and investors excited at a range of prospects, including potential gas-fired independent power projects (IPPs) and the opportunities opened up by the nascent oil industry. Indeed, while swathes of the financial world scratch around for credit, Ghana may have to beware the siren songs of ever more bankers who are looking to win business in West Africa.

Ghana remains a relatively small economy – Nigeria’s population is some five times the size and its GDP ten times bigger. But real GDP growth has averaged 5.8%/yr over the past five years, according to President John Kufuor, and this could be raised to 8% annual growth as first crude production in the Tullow Oil-operated offshore acreage is scheduled for 2010. Ghana’s sustained growth and intelligent economic management – which can hopefully survive the advent of oil – have raised its status as an emerging market that punches considerably above its weight. And this trend should continue if the boom in sub-Saharan fixed income, equities and asset-backed investing is really to be solid and long-term, rather than a focus for ‘hot money’ that departs as quickly as it arrived.

Indeed, Ghana’s emerging markets success offers a positive counterpoint to the horrific situation in Zimbabwe, which again raises major question marks about long-term investment in volatile polities. Much less than a decade ago Zimbabwe was seen, along with Ghana and a handful of others, as a potential motor for sub-Saharan Africa’s economic emergence; indeed, as Ghana emerged from the Rawlings years Zimbabwe’s richer economy received more investor attention. Now, Robert Mugabe and his regime – whose unlovely political structures threaten to live on even longer than the six-term president – must surely soon face an international sanctions regime; talk of buying Zimbabwe-based assets cheaply to await the inevitable democratic upturn rings very hollow.

While the Zimbabwe poison corrodes South African President Thabo Mbeki’s legacy, the Ghana Stock Exchange is booming (with market capitalisation up 52% from 1 January to 11 June) and (central) Bank of Ghana is leading an initiative to recapitalise the 25 banks it regulates, who are looking for over $1bn of new equity to meet an eightfold increase in the minimum capital requirement. The annual Cocoa Board (Cocobod) pre-export financing remains a very tightly-priced market leader (some participants say they only buy in to give them a bit of diversity to their portfolios), and bankers tell African Energy that Ghanaian trade flows continue to generate a steady stream of payments made in full and on time. Projects such as the Accra airport upgrading are receiving support; the UK’s Export Credits Guarantee Department is again backing the airport, and constrained to make money while backing British exporters, ECGD is an institution that will now usually back only sure-fire deals.

In this promising climate, financiers canvassed by African Energy expressed optimism that Ghana could embark on a second phase of IPPs, once the issue of securing gas feedstock from Nigeria through the West Africa Gas Pipeline (WAGP) was tied up. The western port city of Takoradi’s Aboadze thermal power plant was scheduled to receive first gas last December, but the $600m WAGP is still sitting idle, full of only nitrogen, after April and May gas flow deadlines were missed. Official silence on what’s happening here is a worry.

Ghana has an IPP track record, from the 1990s when US group CMS Energy (now owned by Abu Dhabi’s Taqa) and a group of official financiers provided funding worth $410m for the Aboadze plant’s first phase. Built with the aim of reducing Ghana’s dependence on its often unreliable hydropower supply, the now expanded plant is waiting on WAGP gas to replace the increasingly expensive light crude oil burned for fuel. The WAGP gas is finite, but the promised 129m ft3/d compressed gas supply could ultimately fuel 400MW or so of gas-fired electricity production.

This potential is being eyed by a number of potential IPPs that will be capable of running on two fuels, but are unable to begin life on a diesel-fired basis due to exorbitant costs. According to one London-based financier, “we are talking to the sponsors of the 110MW thermal plant at Tema, which has turbines lined up, but is not being built yet because it really needs gas to progress. We are still quite bullish on the deal because the power purchase contract is agreed, the economy is quite strong and there is still a definite power shortfall in Ghana.” Other potential IPPs include two rival schemes in the municipality of Kpone, and the Osagyefo Power Barge 125MW project, a scheme that has faced legendary problems but which is now under refurbishment by Balkan Energy at Effasu on the Ghanaian coast. Both sets of sponsors have indicated that financing is available.

A World Bank specialist concluded: “There are several IPP schemes that have signed power purchase agreements with the government, and have funding lined up, often from development finance agencies.” And it is not just gas-to-power schemes. Waste-to-energy plants are proposed at Kumasi and in three other locations (Tema, Accra and a so far undecided venue) by Tropical Energy Resources, whose business development director David Morrell said the local company was “in the process of finalising funding arrangements”.

According to Ghanaian-owned, London-based, Ghana International Bank’s chief operating officer Andrew Kairu, “we are at the stage now where private equity capital wants to use Ghana as an entry point for West Africa.” Along with macro and political stability, the business environment makes Ghana “easier to do business in” than Nigeria. Even so uncertainties still abound, not least the non-arrival of the WAGP gas that has been promised by Nigeria to feed not only Ghana but also Benin and Togo with the cheaper fuel required to beat down oil import costs and power new industry.

Riding the oil boom

The advent of oil production is likely to trigger a further significant change in external perceptions of Ghana – hopefully, once more, for the better. According to Abena Amoah, chief executive of Accra-based brokerage NewWorld Renaissance Securities, “the majority of the companies servicing the oil and gas sector, such as banks and insurers, are positioning themselves for Ghana’s first oil exports.” She believes that as “the economy is very dependent on oil imports now, and the bill takes up a very significant proportion of the country’s foreign exchange, so getting our own production will have a significant impact on the reserves.” Moreover, because the oil finds are located in the deep offshore, “we should miss out on the onshore problems experienced in Nigeria, and we have also found oil at a time when democracy is relatively healthy in Ghana.”

International bankers see oil as a big opportunity – somewhat to the consternation of donors and local economists, who have seen Ghana move carefully forward in rebuilding its economy, often in the face of intense criticism from a local population that still lives in fragile social and economic conditions. “Everybody is looking at the possibility of financing Ghana’s oil finds,” said the Paris-based managing director of BNP Paribas’ reserve-based lending team Olivier Serra: “Ghanaian country risk is new to the oil world, but the [Tullow-operated] Jubilee Field seems to be a world-class field, even though there is still very little public information, and has world class operators working it. There will be a need for some very large capital expenditure.”

There are already over 41 companies registered for licenses in the oil industry, according to Yofi Grant, executive director of Accra-based Databank Financial Services, which co-managed the sovereign bond issue. “Kosmos Energy has said that by the end of 2009, or by early 2010, Ghana will be producing 100,000-150,000 b/d, which will rise to 350,000 b/d by 2012.”

Trade financiers are already slugging it out. While some serious forfaiters and others reported limited business outside Cocobod and the odd Ghana Commercial Bank deal, others agreed with GIB’s Kairu, who told African Energy: “It’s a competitive market, with names such as Barclays, Standard Chartered, JP Morgan, ANZ and Citi all playing there. Exporters looking for the best deal tend to shop around, and so the pricing for confirming letters of credit from Ghanaian banks is down.” He reported that “the pricing for local risk has become finer and finer over the years, to the extent that we are seeing 125bp [basis points] margins for certain transactions.” Another London-based trade financier priced confirmation or oil-related l/cs at around 2%, and 25bp more for other sectors. “Pricing for Ghana is quite fine now,” this banker stressed.

Tight pricing, of course, works in Ghana’s favour. With credit markets apparently open for bigger deals Ghana could benefit from the upturn in market perceptions for the better African risks. As Standard & Poor’s regional managing director Konrad Reuss observed, Cocobod and gold mining companies apart, “the number of other potential Ghanaian borrowers in the international market is fairly limited.” But, he added: “One possibility is that the Volta River Authority may need financing. NewWorld Renaissance’s Amoah also pointed out that “the players outside the sovereign that are large enough in size to seek capital internationally are very limited.” But she added that Ghana’s oil refineries were “now expanding their capacity, and will be going to market to raise capital.”

Reward yes, but plenty of risk too

There is room for deals to be done, to consolidate Ghana’s position as a growth market and persuade its regional peers that macroeconomic prudence and a commitment to improving governance really can reap dividends – provided decision-makers remain prudent in the face of rising income, and measure the temptations of borrowing against the old spectre of indebtedness if things turn downwards. Facing double-digit inflation and a population under pressure from food and oil price rises, Kufuor’s government is already under pressure ahead of presidential elections in December.

Kufuor observed recently that an oil import bill that stood at $500m in 2005 could be as much as $2.5bn in 2008. Credit to the private sector grew by some 60% in 2007 and Ghanaians may receive a short-term fillip from the usual expansionist fiscal policy that precedes elections – such as the estimated $1bn package to soften the impact of oil prices on electricity consumers – but there are concerns of the legacy this will leave for the incoming administration. In S&P-speak, the fiscal deficit “is likely to continue to widen to 6% of GDP in 2008 due to the general election in December,” while “Ghana’s economy remains vulnerable to external shocks”. There is talk among specialists of “a possibility of a big devaluation [of the cedi], as Ghana has been leaking foreign exchange reserves recently, to pay for oil.” Public funding pressures might be eased by the estimated $800m-1.5bn that might be raised from privatising Ghana Telecom. But analysts like Exotix chief economist Stuart Culverhouse argue that it may be for Ghana’s future flow of oil receipts to alleviate currency risk for outside investors. “That’s what happened in Nigeria, where the naira appreciated last year,” Culverhouse told African Energy. Welcome to the oil industry, enterprising Accra.

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