Investing in Ghana: Opportunity or Risk?
I was in Lagos, Abidjan, and Accra recently. I have been to Nigeria several times before and Cote d’Ivoire once before, but this was my first visit to Ghana.
Just like my home base, Dar es Salaam, Accra is a city by the sea. The port and industrial park at Tema, 25 km east of the capital, are a hub for the Ghanaian economy.
Ghana’s export earnings are led by gold and cocoa. Gold is doing well. Cocoa is not.
Gold exports power the economy, while cocoa is struggling
Ghana has regained its position as the largest gold producer in Africa, toppling South Africa. President Adufo-Akko made the following statement in his State of the Nation address back in February:
“Our gold production reached an unprecedented four million ounces, according to preliminary reports. The reduction in withholding tax on unprocessed gold by small scale miners, from three percent to one and a half percent has resulted in some 900 percent increment in gold exports from the small-scale sector, over the last two years.”
There are, however, challenges that come with this.
Ironically, artisanal gold mining encroaching on cocoa growing lands and the resultant pollution of ground water supplies are serious problems. Combined with the ageing of Ghana’s cocoa trees, adverse weather conditions, and disease, this year’s cocoa harvest was a 10-year low of 480,000 tonnes.
Whilst in Accra we met with a cocoa farmers’ representative. It is well known that the chocolate industry is one of the most controversial, as the biggest chocolate brands, manufacturers, and middlemen in the highly concentrated supply chain are raking in the spoils from this $100 billion industry.
However, speaking directly with farmers, such as Mr. Issaka here, really brings home the scale of the problem.
Based on the harvest (a low mark for the last decade) of 480,000 tonnes, a government regulated price of $3,000 a tonne, and 1.3mn cocoa farmers, the average Ghanaian cocoa farmer is earning a paltry $1,100 a year! Meanwhile cocoa production declines have seen global spot market prices spike to triple the price that the Ghana Cocoa Board pays farmers… so, who is making all the money?
The low cocoa harvest has hurt Ghana’s economy. But meanwhile, record-high gold prices are helping.
And the country is going to reap the full benefit of this with the near-completion of a gold mine to rival Newmont Mining’s Ahafo South—currently Ghana’s largest gold mine. The new mine is set to become, not only the largest in Ghana but in West Africa. This addition should further cement Ghana’s status as the biggest gold producer in Africa.
GDP growth for the 2nd Quarter surprised on the upside, recording 6.9% growth versus 2Q2023
But even growth like this isn’t enough to dig Ghana out of its current hole.
Ghana’s government has in the past borrowed and spent lavishly. But it is not paying its bills. Unfortunately, it appears that a lot of money has been lost to graft and corruption.
On our way from Accra to Cape Coast, we saw a massive 6-lane highway under construction, meant to extend all the way to Cote d’Ivoire. But it looked as though construction has ground to a halt in most places. The work appeared haphazard, and there was a lack of proper equipment.
We also spoke to a foreign businessman whose company’s sole customer is the government of Ghana. His firm has not been paid since July.
In 2022, Ghana defaulted on both its overseas USD-denominated Eurobond debt and, in what was an especially shocking development, also refused to pay back domestic government bond obligations to several local creditor segments, including the banks.
Since then, the Ghanaian Cedi has been among the worst performing currencies in Africa and shows no sign of rebounding. In the time I have been investing in the Ghana stock exchange, the Cedi has gone from 5.77 to the USD dollar to 15.75 (or 16 on the parallel market). That’s a loss of 63% of its value.
The cynical view is that any further tranches of dollars disbursed in the current IMF bailout package ahead of December’s Presidential election will just find its way into the hands of the well-connected elites who are scrambling to convert their ill-gotten gains into hard currency. Some economy watchers are penciling in a further deprecation of the Cedi, from 16 to the dollar to 20 to the dollar.
Telecommunications, and not banks are our preferred investment in Ghana
Shell shocked from the domestic bond default which wiped out a good part of their capital base and strict new reserve ratio requirements from the central bank, Ghanaian banks are gun shy and not lending. Their loan to deposit ratios are among the lowest I have ever seen, at around 40% on average.
Banks make up the biggest number of the companies listed on the Ghanaian Stock Exchange. But there were none that we would consider good investments at this stage.
There are however some bright spots among the companies listed on the exchange. The dominant mobile phone company, MTN Ghana, which African Lions Fund has owned shares in for more than 3 years, is doing superbly. The company is undergoing a network optimization program, upgrading its equipment to new 5G-ready base stations, and making more effective use of its spectrum. Management shared with us that any boost in data quality and coverage immediately results in higher data traffic and consumption.
MTN remains a good proxy for the Ghanaian domestic economy and is our preferred way to get investment exposure to the country.
Some export industries are also doing well. For example, Ghana’s Most Favoured Nation status, which gives tariff exemptions on trade with the USA, as well as its location on the Atlantic coast, away from trouble-spots causing shipping chaos in the Middle East are key competitive advantages for the garment industry.
One highly successful, but unlisted, company in this sector, which we also visited, is DTRT Apparel. The company imports textiles from China but does all the cutting and sewing of garments for the US market in Ghana, at its facilities in Tema and Accra.
We visited the Accra factory. Wages are some 30% lower than in Bangladesh or Vietnam. But the Ghanaian workers receive many other benefits and support, and generally looked very happy and healthy.
It goes to show what is possible, with the right combination of investment, knowhow, favourable operating conditions, and qualified labour are deployed to service a ready and growing market.
Other key observations on Ghana
1. Fuel in Ghana is cheap, same as Nigeria. Taxes must be relatively low. A price of 12.31 GHS a litre translates to about US$0.77 – half of what I observed it costs in neighboring Cote d’Ivoire, which we had visited 2 days prior. Smuggling in the border areas is therefore a problem.
2. Physical tax stamps are widely used in Ghana. This is a measure implemented by the government to combat the problems of illicit trade and smuggled goods, which result in significant losses in government revenue. Even soft drinks are being smuggled into the country!
Recently, the Ghana Revenue Authority has proposed new digital machines for excise stamps, but so far it is being met with opposition.
Proposed new tax stamp machines to compound burden of businesses — FABAG warns GRA – Graphic Online
3. Plastic pollution is a huge problem
We visited Labadi Beach in Accra one morning and witnessed local fishermen hauling in their nets. It surprised me they caught so many fish right off the beach in the surf. But, what truly shocked me was the amount of plastic waste they also caught.
Clearly people are not being responsible with waste, which washes in from all over along the Bight of Benin. The world truly does need to change if we are to maintain the planet’s ecosystems in working order. It cannot be healthy to eat these fish. But, local people have little choice.
On a related note, the bottled water industry leader in Ghana seems to be an independent company called Bel-Aqua, which has not yet been acquired by a multinational.
In every Frontier market, one of the first bits of research I do is to work out who manufactures such staples as bottled water, cooking gas, and the like. Rarely can we invest in these companies via public markets, but occasionally it is possible. Alas, not in this case. I will keep on looking!
4. The Tourism Industry remains underdeveloped
Ghana was a major centre in the horrific trans-Atlantic slave trade. All along the coast, at scattered intervals, lie so-called “forts” or “slave castles.” One such fort, at Cape Coast, has been well preserved and restored and is now a UNESCO World Heritage site.
We drove for 3 hours and 45 minutes or so from Accra to see it. The tour was both informative, and disturbing.
But aside from that, somewhat surprisingly, there is little or no tourism infrastructure along this coast today, despite hundreds of miles of coastline and beaches that would seemingly be ripe for tourism.
All in all, my trip to Ghana was informative. It is not a country that we currently have significant exposure to at African Lions Fund. But it is on our watch list.
Until next time,
Good Investing!
Tim Staermose
Founder, Global Value Hunter
& African Lions Fund Ltd.