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The combination of expected-persisting monetary accommodation along with a hitherto sticky, macro-proof global demand profile for diesel (influenced further by the looming likelihood in China of a weather-aggravated supply shortage in the coming months) make West African crude and, by proxy, its sovereign credit our holiday frontier market wish list security of choice. The latter phenomenon–i.e. the burgeoning diesel/gasoline spread (see chart below)–continues to play on an ongoing theme, namely per one pundit the “diverging drivers behind the consumer and industrial activities as [developed market] high unemployment and stagnant wages continue to crimp consumer spending, while industrial and manufacturing activity [particularly in developing economies] are revving up.” Barclays energy wonk Paul Horsnell further elaborated on diesel’s EM-fueled, relative buoyancy in a research note from last week:
“Ever since the migration of non-OECD countries to the margin of the oil market, diesel demand has received a significant boost on a global scale, given the bias of diesel in the oil mix in these countries. Its dominant position in commercial freight traffic has made it a fast growing demand component in countries characterised by large distances in internal trade and by strong underlying economic growth. For instance, in China, significant government investment in the road system and a mandate in 2000 that all trucks should run on diesel by 2010 facilitated the rapid expansion of domestic diesel demand. Beyond road transport, diesel also continues to be the primary fuel employed in China’s rail system, as well as being a major fuel for several significant types of marine transport. A similar picture can be painted for India, where diesel makes up 70% of road fuel use due to the intensity of truck and bus fuel consumption as well as the increasing penetration of diesel within the passenger car segment. In a country with some degree of oil product price subsidisation still in place, diesel prices are considerably more politically sensitive than gasoline. It has, therefore, usually proved easier to allow retail gasoline prices to rise with international markets, while retail diesel prices can often be stickier, with the current retail price discrepancy between gasoline and diesel almost double in India.”
Thus despite this weekend’s report indicating Asia would cut its African sourced imports to a three-month low, we expect lower or “sweet” sulfur blends (about half of the average Brent) from Angola and Nigeria (versus heavier or “sour” grades from Saudi Arabia and Iran) and their associated higher (up to twice more) distillate yield to continue to be in vogue. The Chinese in particular continue to suffer from tight supply side dynamics–“especially in the country’s Northern, Eastern and Central regions” per Horsnell–such that net product imports (at 322k b/d in October, higher than the year-to-date average of 286 thousand b/d) will likely continue to trend up. And while Nigeria, Africa’s largest oil producer, plans to export 2.18m b/d of crude next month, with Angola second at 1.72m, we remain impressed with the relative price stability in Ghana in the face of oil output that, while growing, still fell short of expectations. Granted, Ghana’s fiscal targets (both its own and those set by the IMF) were predicated on abnormal output, and thus the initial 5.5% of GDP deficit estimate may turn out to be a bit pollyanna given President John Atta Mills’ looming showdown with Nana Akufo-Addo (close runner-up in 2008) next year. Yet inflation expectations remain sanguine enough (CPI +8.6% y/y in October from 8.4% in September, in line with consensus, while non-food inflation was unchanged at 11.3% y/y, suggesting still modest inflationary pressure per analysts) that the country’s 12.5% policy rate will most likely remain unchanged into 2012. To echo our sentiment from last spring, therefore, Ghana’s 2017 Eurobonds remain attractive versus peers.
Market frenzy received additional filips this week upon rumors that not only may China opt to essentially underwrite Italian debt (adding further confusion, perhaps, to the whole ‘Made in Italy/China” kerfuffle), but furthermore that perhaps the entire BRIC contingent would pass around a continent-wide, boosting collection jar in what some cynics quipped would ultimately amount to an ironic albeit ill-fated form of reverse-colonization. The comment ties nicely with last week’s Economist piece noting Angola’s sudden Portuguese shopping spree, a “first for Africa” whereby national oil company-cum-sovereign wealth vehicle, Sonangol, “acts as the government’s main dealmaker and overseas investor.” This got us to thinking that despite Absa Capital’s recent warning to clients that “the current bout of financial market turbulence and fears of a global economic slowdown . . . provide a new impediment to [sub-Saharan] growth . . . which may have a dampening effect on growth prospects in the region” there should emerge a divergence in performance between the region’s commodity net-buyers and sellers, which in turn should augment their respective monetary policy flexibility (i.e. to not have to choose between growth and inflation, a priceless luxury for any economy and especially against a stagnating global backdrop). The former group, admittedly, is commodity-derived cash rich and thus dependent on its exports to help build FX reserves, temper policy rates and buoy credit. Yet, per Absa, “in the absence of a sharp deterioration in global growth, commodities should remain an important pillar of growth [in Ghana, Nigeria and Angola], where firm oil prices of above USD110/bbl continue to support growth [and help] economic activity remain robust.” The latter group, meanwhile, already victims largely to poor diversification among its economic sectors, may get stuck in an inflation-importing conundrum a la Kenya currently, where climbing inflation (16.7% in August) sits in stark contrast with, per comments made by the country’s monetary policy committee, a relatively glum growth outlook for 2011H2.
Although the Bank of Ghana’s Monetary Policy Committee is widely expected to again maintain its Prime Rate–the rate at which it lends to commercial banks–at 13.5 percent, the state’s expansionary fiscal policy (namely ever growing public finances) is such that any unexpected slowdown in its current account (CA) deficit reduction (from 8.5% of GDP in 2010 to a 2.2% forecast in 2011 and dependent on high prices for gold, cocoa, and oil and a near doubling in the latter’s production to an estimated 120,000bdp by year’s end and over twice that by 2013) combined with inflation lingering above the Bank’s 8.5% target could tempt policy makers to hike the policy rate sooner than expected as a sort of preemptive strike. Yet at last count March inflation (9.1% y/y) surprised slightly to the downside even as food inflation (which accounts for 45% of the country’s CPI) ticked higher to 4.7% y/y in March from 4.6% the previous month. However given that the pass-through impact from domestic fuel prices–which are adjusted once a quarter, jumped 30% on average in January and theoretically were set to be raised again last month–have already made their way through producer prices, which have risen each of the past two months, it seems likely that the inflationary trend will be upward; Absa Capital analysts, for instance, expect a 50bp hike by Q411. That still, however, leaves the Bank relatively dovish within SSA. With this in mind the recent commodity sell-off makes Ghana’s widening 2017 Eurobond spreads ever-more attractive, especially since the Cedi looks to remain supported by trade flows, foreign reserves and robust near-term growth prospects (12.8% projected in 2011). Finally, the Bank’s latest credit extension survey [to both businesses and households] continues to improve, a positive for the country’s non-oil sector.
The interplay because geopolitics and equity markets–especially when it comes to relatively under capitalized and illiquid developing markets–has been well documented this year against the backdrop of MENA social unrest. But when it comes to trading sovereign debt the importance of insightful political stability and transparency analysis becomes almost as integral a facet to assessing risk premiums as are more conventional fiscal measures. Beyond Brics notes, for instance, the “strong recovery” in Ivory Coast ’32s which fell to 35 cents on the dollar during last month’s nadir and following a missed $29m interest payment at the beginning of the year but have since rallied to 54.6 cents. If only I could have had that crystal ball when a risk consultant back in December emailed me out of the blue asking for my prognosis. That said, while the bounce-back no doubt stems largely from Alassane Ouattara’s official ascent into power, social unrest remains problematic–especially since much of it hinges on the hitherto unresolved issue of land reform that also lies at the center of ensuring cash flows from cocoa–the economy’s lifeblood and thereby a bond holder’s best friend–remain stable. Aid money will help meet debt arrears as will forgiveness of nearly a quarter of debt outstanding, but a fractious constituency may remain fractured longer than expected and shouldn’t be discounted. Meanwhile, in similar fashion analysts with Barclays suggested taking profits on Nigeria’s 2021 Eurobond given its spread narrowing to date vis a vis the benchmark Ghana ’17s despite higher oil prices and improving fundamentals. The call may be prophetical given news of ‘orchestrated’ post-election violence, the country’s history of slumping oil production following elections in 1999, 2003 and 2007, and an uptick in seized, illegal arms shipments to Lagos. To that end, disruption to Nigeria’s light sweet crude output “would come as a double blow for refiners already scrambling to replace the loss from Libya,” per analysts.
Cocoa prices continue to seemingly stall now a full week now into the one-month export ban imposed by the UN-backed government of Alassane Ouattara, strengthening the case for at least an intermediate top. May Cocoa surged 7.5 percent last week to an intraday high of £2,307 a ton in London on first word of the impending physical flow disruption, though it just as quickly pared gains and finished up just 2 percent at £2,160. While later that week the price closed at a six-month high of 2,269, it currently sits at 2,175/ton and–to the degree that the overall market is in surplus (the FT noted that “even taking into account the problems in Ivory Coast, there may be a surplus of about 50,000-100,000 tonnes, breaking four consecutive years of poor crops, the longest shortage period in the cocoa industry since 1965-69″) thanks in part to an above average October-February harvest not only domestically but also in neighboring Ghana (which supplies roughly twenty percent of global supplies, or half that of the Ivory Coast; see chart right), the 33-year high of £2,714 realized last year will likely stick. Lackluster demand growth will also tend to be bearish for short term prices: Rabobank wrote to clients in December, for instance, that “the slow rebound in growth [in the U.S. and Europe] after the financial crisis is a function of confectioners’ using substitutes such as palm oil and reducing product sizes to support margins” and is likely to continue in 2011.
Political uncertainty aside—a prolonged struggle could disrupt this spring’s mid-crop which in turn could fundamentally disrupt hitherto hedged trading houses and production makers—a long-term secular rise in cocoa remains viable given the lack of infrastructure and investment to date in the Ivory Coast. Analysts note that “issues range from aging and mature trees which need renewal (cocoa trees mature approximately four years after planting while peak yields can be maintained for about 30 years); the lower usage of fertilisers and pesticide by farmers for tree maintenance and substitution away from cocoa into rubber. Tempering this envisioned supply shock, however, is the possibility of an enduring uptick in Ghana’s cocoa production capacity—Cocobod, the state’s cocoa board, estimates this year’s crop is already 40 percent higher than last year and believes it will reach its 800,000 ton target by the close of the season (which thus far has helped make up for the estimated 100,000-300,000 tons trapped in Ivory Coast warehouses), and aims to raise annual production to one million tons within two years. Thus far, officials state, better weather, increased use of pesticide and fertilizer and overall better planting techniques have underpinned the bumper crop. An additional amount of uncertainty in the market stems from smuggling as well as the possibility of price differentials across countries—Ghana lost around 100,000 tons of beans to the Ivory Coast last year due to price arbitrage. That said, increased border security and additional quality and monitoring personnel have largely curbed reverse flows, a Cocobod source claimed.
Further monetary restraint on the part of the Central Bank of Ghana to keep its policy rate at 13.5 percent and support “still-sluggish domestic demand”–coupled with recently initiated oil production that will increase from an initial 50,000 to around 120,000 bpd within three to six months per Tullow Oil and also help the country achieve real GDP growth of roughly 13 percent next year (versus 6.5 in 2010)–should maintain the attraction of impending primary auctions of cedi denominated, 3-year sovereign paper which remain “the most attractive local debt market opportunities in Sub-Saharan Africa” according to Absa Capital. Demand stemming from said auctions has steadily grown this year as investors become more convinced that hitherto volatile CPI figures have been tamed–inflation reached a five-year high of 20.7 percent in June 2009 but fell to 9.5 percent this past June (declining for the first time since December 2007 below 10 percent). That said, analysts foresee public sector wage increases, higher food prices and utility price hikes all pushing inflation back into double-digits (around 11 percent) in the coming year. Moreover, despite the newfound oil revenue some observers (including the IMF) question the country’s fiscal discipline. While total public debt rose from USD8.5bn in September 2009 to USD11.3bn a year later “the fact remains that at least during the cost-recovery period, fiscal revenues will likely not be substantial enough to fund huge [social and other] infrastructure outlays” Absa wrote earlier this month, highlighting the cost-recovery period as well as a proposed bill before parliament that would automatically siphon some 30 percent of oil-related revenues to a “Stabilisation and Heritage fund.” Nevertheless, finance minister Kwabena Duffuor maintained to Bloomberg in November that the nation’s cash budget deficit would narrow to 7.5 percent of GDP in 2011 from roughly 9.7 percent this year, and then drop to to 4.7 percent in 2012 and 3 percent in 2013 as energy revenue “built up.”
In writing that “given the external demand, issuing [debt] overseas can be a cheaper option for African governments and corporations than their relatively small domestic debt markets, provided they can offer a bond big enough to whet foreign appetite,” a recent piece on rising Africa bond issues notes, for example, that “Ghana’s Eurobond was issued with a coupon of 8.5 percent, compared with the 13.95 percent on a three-year note issued locally the same year.” In whole, sub-Saharan debt issuance totaled $5.6 billion in the first nine months of 2010, down 30 percent year-over-year but well above the $1.6 billion in the first nine months of 2008, according to Thomson Reuters data.
Ghana’s bond is somewhat infamous in that it was the first dollar-denominated debt issued by a sub-Saharan government apart from South Africa and is labeled by some as a “benchmark” for African frontier debt; its yield spiked above 23 percent in 2008 but has consistently made new lows this year, falling to 5.746 earlier this month for instance. Moreover, a recent data overhaul revised 2009 output by 75 percent and allowed it to “leave the ranks of the World Bank’s low-income bracket of countries such as Liberia and Afghanistan [in order to] join the more affluent ranks of Thailand and the Ivory Coast.” This only a few months after S&P downgraded its credit rating to B, citing concerns about large fiscal deficits and a lack of clarity on oil-industry laws (the country is due to begin the production and export of 120,000 barrels of oil a day in 2011). Moreover, finance minister Kwabena Duffour noted last week that the cash budget deficit would narrow to 7.5 percent of GDP next year from roughly 9.7 percent in 2010, and proceed to drop to 4.7 percent in 2012 and 3 percent in 2013. The changes “should foster a rating upgrade,” per one analyst.
Bloomberg reports that Ghana’s Eurobonds have surged 93% since last November and may continue to rise given the country’s increasingly attractive fiscal position due in part to the production of a new oil field that is expected to put it in the world’s top 50 oil producers and to expand growth from an estimated 4.1% this year, to 6.1% in 2010 and 10.5% the year after. The yield on the 8.5% dollar-denominated bonds due 2017 fell from 9.83 to 9.73 percent during trading on Tuesday.
Ghana was the first post-HIPC (Heavily Indebted Poor Country) debt relief country to access the international capital markets, after being assigned a favorable credit rating of B+ in 2007 by the Fitch, the global rating agency. While a slew of other African nations such as Kenya, Tanzania and Nigeria lined up in response, capital markets and risk appetite shriveled during the ensuing global credit crisis, and Ghana also had to shelve a $300 million bond last September due to poor reception. And in May, another ratings firm, Standard & Poor’s, warned of more African downgrades later this year, giving a “negative outlook” to seven out of the 19 African sovereigns it rates: Ghana, Madagascar, Nigeria, Senegal, South Africa, Botswana and Seychelles.
Yet a subsequent rise in global markets–fueled by a commodity rally and narrowing spreads, may have tempered that gloom. In Ghana’s case, the oil announcement, coupled with IMF and World Bank largesse, combined to give a rosier picture of the country’s balance of payments.
Per Bloomberg, Ghana expects to pump 500,000 barrels of oil a day by 2014 as it seeks to boost supplies to the domestic market and become Africa’s newest crude exporter. The government recently approved a plan to pump crude from the Jubilee field in the second half of 2010. Moreover, the various group developing Jubilee have agreed to “donate some of the field’s natural gas to the nation to fund pipeline development and boost the local economy.”
According to Dr. Yeboah Woode, Research Scientist and Lecturer for the Department of Chemical Engineering, Kwame Nkrumah University of Science and technology (KNUST) in Kumasi, and Executive Director of Marglas Potash Industries (MPI), potassium carbonate (potash salt) produced from cocoa husks has large economic potential that should be exploited for cocoa farmers and the country. Dr. Woode recommends that the government support individuals and organizations to produce potash salt extracted from cocoa husks in commercial quantities to boost incomes of cocoa farmers and create employment for the youth and women in cocoa growing areas. Currently, MPI cannot meet the foreign daily demand of roughly 1,000 tons of potash salt produced from cocoa husks. However, Dr. Woode said that management could meet the demand with government assistance to establish more factories in major cocoa growing areas throughout the country, further explaining that this would not only offer employment for the youth provide extra income to cocoa farmers but also generate about two million dollars in foreign exchange to the country. “Ghana needs to realise the full potentials of cocoa to benefit farmers and the country,” he added. Moreover, he said, salt extracted from potash would help to reduce the importation of potassium salt into the country and also to diversify the country’s export earnings. At present, MPI plans to establish more factories in major cocoa growing areas by 2010 and is appealing to both government and the Ghana Cocoa Board (COCOBOD) for assistance.
JGW
Frontier Markets 