Business & Finance INDUSTRY

LOWER CRUDE OIL PRICE, POWER SUPPLY CHALLENGES CAUSES OF LOWER FDI – ECONOMIC ANALYST

A senior economic analyst at Databank, Courage Kingsley Martey, said that the fall in foreign direct investments to Ghana is as a result of the lower crude oil price and power supply challenges during the past year.

Mr. Martey said that the situation has eroded the confidence in the Ghanaian economy, adding that other emerging markets were experiencing similar lower investment levels. He said, “this is in particular to primary commodity exporting markets.”

The Ghana Investment Promotion Center last month released results of FDI in 2015, indicating a 31 percent decrease from 2014’s $3.4 billion.

Mr. Martey believes that this is partly due to the decline in prices of Ghana’s main commodities, especially crude oil.

“The sharp decline in crude oil price saw investment slowdown not only in the Ghanaian sector but other West African countries as well. As a result, it affected foreign employment levels in Ghana negatively,” he said.

He explained that apart from the adverse impact of the lower oil prices on capital investments by the foreign investors, the country had also increased its expenditure against expected crude oil revenue. However, the last two years have seen a dip in actual revenue, meaning an increase in debt finance indices and exchange rate pressures. This, he believes, could also have been one of the reasons investors are averse to invest.

“The country’s ability to refinance its debts has been negatively affected by the lower crude oil price. One of the government’s debt management strategies is the establishment of the sinking fund. Its source of funding is from excess crude oil revenue above the cap on the stabilization fund.

“However, when you have a situation where crude oil price drops, revenue inflows to the sinking fund is affected. This would constrain the country’s progress towards managing and servicing its debts.”

The economic analyst also said that the country’s power challenges could be another leading reason why foreign investment in the country has reduced. He said power cuts raised the cost of doing business, serving as a disincentive for investors.

Other factors he attributed to the reduction in FDI were bureaucracy and the country’s tax regime. He said these two factors affect the competitiveness and productivity of businesses operating within that environment.

Likely implication for Ghana

Mr. Martey said there are likely implications for lower FDI into the country. In the short term, “employment is going to slow down because people would not get jobs as quickly as before”.

He added that economic expansion would be ultimately affected, including affecting the country’s currency negatively due to a reduction in foreign currency inflow.

For real estate, demand for luxury housing could be affected as a result of less influx of expatriates. Domestic employment however increased by over 15 percent according to GIPC’s report. Mr. Martey believes that a shift from luxury housing to affordable types would be best placed for the sector.

He added that more focus was needed on the stability of the cedi to ensure that the real estate sector maintained a healthy growth.

“Real estate companies normally plan for the long term and cater to diverse markets. So if there is a fall in demand for luxury housing, the focus can shift towards domestic demand.”

“The industry will not be heavily affected by the lower influx of foreign expats, though. The important aspect is the stability of the cedi to ensure that individuals can qualify for mortgage,” he said.

Akua Nyame-Mensah, Managing Director of property portal, Lamudi Ghana, said the domestic employment growth has created a great opportunity for real estate developers.

“The focus for the Ghanaian real estate market is currently luxury housing. Though the reduction in expat employment may not affect real estate business drastically, it still would have some slight implications,” she said.

“Meanwhile, the GIPC report indicates growth in local employment. This serves as a great opportunity for real estate developers to diversify and tailor their products to this segment of the Ghanaian population.”

Lamudi Ghana’s Managing Director added that the government could assist such developers with tax reliefs and land banks to reduce their development cost.

Source: Fidel Amoah, Content Manager, Lamudi Ghana

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