DAKAR, Sept 3 — Is Ghana being hit by the resource curse even before the oil starts flowing?
Three months before pumping starts at its Jubilee offshore field, a credit downgrade, governance concerns and the fall-out over its resistance to the sale of prime assets to ExxonMobil risk tarnishing its golden image with investors.
The West African nation is determined not to follow others in discovering that resource wealth, while it can boost the economy, also can be a curse, fuelling political corruption, undermining other domestic sectors and even triggering civil strife — witness nearby Nigeria.
Standard & Poor’s move last week to downgrade its sovereign ratings to “B” from “B+”, citing concerns over public finances and oil sector regulation, has taken many observers by surprise and may prompt a closer look at Ghana’s prospects.
“When you benchmark Ghana against the sub-region, it is still a very attractive place to do business,” said Rolake Akinola, a London-based analyst at Eurasia Group.
“But it has been given a bit of an easy ride,” she added of the widespread view of Ghana as a beacon of stability and democracy in an otherwise challenging neighbourhood.
The S&P downgrade came after the World Bank’s Multilateral Investment Guarantee Agency (MIGA) in July suspended a political risk insurance contract for the new production facility due to handle Jubilee’s initial 125,000 barrels daily output, citing the need to conduct due diligence into the contract.
It was also a week after US-based Kosmos Energy cancelled an estimated $4 billion deal to sell its stakes in Jubilee to ExxonMobil after months of resistance from local state oil firm GNPC, which made no secret of its own interest in the assets.
“It is not for us to judge the right or wrongs of the case but one of our concerns has been that this could be detrimental to investor sentiment,” S&P analyst Christian Esters said in a telephone interview.
Price shocks
Esters noted that legislation to regulate the oil sector still had not been signed off by parliament, and said the agency believed efforts by President John Atta Mills to narrow the public deficit were not having the full anticipated effect.
“We believe the pace of improvement will be slower than we anticipated, which means the accumulated debt is higher than expected,” he said, forecasting government debt at 62 per cent of output by end-2010 compared to a median 41 per cent for other “B”-rated sovereigns.
Razia Khan, head of African research for Standard Chartered, acknowledged concerns such as the high level of public wages and contractor arrears, but argued that the downgrade failed to fully take into account one factor — the oil.
“With the country now set to become an oil producer, a key structural vulnerability will be dealt with,” she said of the prospect of Ghana being able to end its exposure to price shocks from imported oil, a root cause of past budget woes.
Ghana expects to be producing 250,000 barrels a day by 2013, which based on current levels would make it sub-Saharan Africa’s sixth largest producer after Nigeria, Angola, Sudan, Equatorial Guinea and Congo Republic.
In March, Ghana expected a budget boost of US$490 million (RM1.5 billion) from oil next year, rising to a US$2 billion peak in 2017, based on a 10-year average oil price of US$65 compared to Friday’s US$74.64 rate. Total 2010 government spending is budgeted at 1.8 billion Ghanaian cedis (US$1.26 billion)
Race for regulation
It remains unclear to what extent the noisy dispute with Kosmos will put off other potential investors. Ghana argued it was not against the deal in itself but said Kosmos breached a confidential accord in its dealings with ExxonMobil.
The Financial Times reported on Thursday that Kosmos’s private equity backers Warburg Pincus and Blackstone Group were considering taking the company public. Two sources familiar with the situation told Reuters that such an IPO was among the options being considered for the business.
Ghana has rejected the S&P rationale for its downgrade, saying its public finances were sound and that legislation to regulate the sector was on track.
“It is not the case that we have folded our arms. We know that something must be done and we are working on it,” Finance Ministry spokesman Abdul Hakim Ahmed said.
Yet the timing of the final bills, which Ghana says will ensure the oil proceeds will benefit the country rather than corrupt its politicians, remains in doubt.
“If they want to do a thorough job, let them start in earnest now,” Minority Leader Osei Kyei Mensah-Bonsu told Reuters late on Thursday, saying a schedule for committee work on the drafts in parliament still had not been offered.
Standard Chartered’s Khan played down the impact of any possible delays to the start of oil, noting that the initial benefit to state coffers will in any case be limited because much of the early proceeds will go back to the oil companies.
But Eurasia’s Akinola said the concerns showed the need for Ghana to waste no time in finalising regulation of the sector to avoid putting off potential investors at a time when oil firms were increasingly eyeing prospects in West Africa.
“It would be crazy if you had companies trying to acquire stakes and they didn’t have a (regulatory) framework,” she noted. — Reuters
