Business Analyst - September 16

Thursday, September 16, 2021
GHANA’S UNSUSTAINABLE
BORROW AND SPEND
ATTITUDE
JusT last week, Moody’s, one of the three international
sovereign credit rating agencies that tracks and assesses
Ghana’s public credit worthiness reaffirmed its rating of
the country as B3 with negative outlook. By international
standards this makes many multinational corporations far
more credit worthy than Ghana. Worse still the negative
outlook is a warning that the agency believes Ghana’s
fiscal situation will get worse before it gets better.
This rating , which is basically the same as that of the
other two credit rating agencies – Fitch and standard &
Poors – does not mean Ghana cannot get access to more
debt on international capital markets, but it does mean
that further borrowing will be increasingly expensive with
regards to the interest rates demanded by investors in
Ghana’s international bond issuances.
It is instructive that already, public institutions such as
COCOBOD and GNPC can borrow at cheaper rates than
government itself. It is also instructive that government
declined to borrow as much as it originally intended to in
its most recent Eurobond issuance in March this year
because it considered the interest rates demanded by
investors on half of the total us$6 billion offered to be too
expensive.
At the risk of sounding like a repetitive doomsayer this
newspaper protests that Ghana’s debt trajectory is
completely unsustainable. Indeed our current public debt
to GDP ratio of about 77 percent is only because
government continues to classify large portions of the
public debt as not being sovereign debt, most notably the
legacy energy debt. If all the public debt was included in
government’s computations the ratio would exceed 80
percent , well higher than the ratios of our peer middle
income countries.
unfortunately the incumbent government’s stance on
public borrowing is little different from that of its
predecessor which it correctly criticized vehemently when
still in opposition; borrow more than what is sustainable
now to get money to please the electorate, refinance
whatever debts are falling due by borrowing from Peter to
pay Paul and leave the ultimately disastrous results to be
someone else’s problem having left office long before the
day of reckoning arrives.
Consider this: in 2021 49 percent of Ghana’s tax
revenues are being used to service debts; banks as a rule
do not allow households to be indebted beyond using more
than 40 percent of their revenues to service the debts,
because it would make the household’s financial position
untenable. In short, if Ghana was a household, no bank
would lend it money anymore.
From next year the series of Eurobonds issued annually
since 2013 will start falling due for repayment every year
and with our current poor credit rating, it may be even
more expensive to refinance them than it was to issue
them in the first place.
successive governments have pointed to Ghana’s rising
oil production and consequent revenues as the eventual
source of repayment of the country’s foreign debt. Indeed
this is a central theme of all our road shows when seeking
investors for our Eurobond issuances. But it is instructive
that our foreign – and total – public debt has been rising
even faster than those revenues over the past decade.
As long as investors are willing to buy Ghana’s bonds,
albeit at rising coupon rates, successive governments will
continue to issue them, using the proceeds to please voters
in order to stay in power and enjoy the obvious benefits,
while assuring that all is well.
It is not. Eventually, Ghana’s house of cards will fall, but
long after those successive governments that built it have
left power and are enjoying wealth that will insulate them
from the economic difficulties most of the populace will
have to face.
unfortunately we the doomsayers are also the truth
tellers.
South African
retailers retreat from
East and West Africa
tHe recent
announcement that
south african retail
company Massmart
was selling off its
once-prized Game stores in five
african countries rang alarm bells
about the future of consumer
opportunity in africa.
For the past decade and more,
a consumer boom has been driven
by demographics, the growth of
the middle class in africa, high
growth in a dozen or so countries,
increasing demand for quality
goods and products, and a taste
for more modern shopping
environments.
But in the past year, there has
been a retreat of south africa’s
biggest retailers from many
african markets. shoprite
announced last year it would sell
its 25 stores in Nigeria and later
revealed it would also shed its
stores in Uganda, Kenya and
Madagascar. Mr Price closed its
last store in Nigeria in early 2021
and in august this year, tiger
Brands said it was selling its 49%
stake in UaC Foods, one of
Nigeria’s biggest consumer
companies.
Massmart follows
the trend but remains
in Southern Africa
Massmart announced recently
that it was busy selling off 14
stores in five african countries as
part of a group turnaround
strategy to stem losses in its
Game chain both in african
markets and at home. Five stores
will be sold in Nigeria, four in
Ghana, three in Kenya, and one in
each of Uganda and tanzania.
Massmart CeO Mitch slape told
investors, “the performance and
the complexity in running those
businesses is something that,
frankly, we needed to address.”
this leaves it with its
investment concentrated in
southern africa: Botswana,
Lesotho, Malawi, Mozambique,
Namibia, swaziland and Zambia.
retailers were struggling even
before the pandemic course, the
Covid-19 pandemic has changed
many forecasts for african growth
as lockdowns and global paralysis
in 2020 affected jobs and incomes
and precipitated general
economic hardship. this had a
knock-on effect on consumer
demand in many african markets.
However, the investment story
was already taking strain by the
time the pandemic arrived. Covid-
19 has hastened, rather than
caused, the pullback of south
african retailers from far-flung
regional markets.
Game and shoprite have been
the main anchor tenants in many
of the shopping malls built in
Nigeria and other african
markets. they were the tenants in
the first western-style mall in
Nigeria that opened in 2005. Both
chains also entered the highly
competitive Kenyan market later,
with their early expansion
strategy focused more on markets
with obvious gaps in the retail
sector. Game tried to enter
through acquiring local firm
Naivas, but it was unsuccessful
and opted instead to roll out its
own brand. shoprite only entered
Kenya in december 2018, taking
advantage of a gap in the market
provided by the collapse of the
country’s biggest chain,
Nakumatt. However, it announced
the closure of its two stores there
during 2021, saying they were
underperforming.
Competing with local
informal markets
Massmart’s drive to expand
was similar to that of other
retailers: increasing competition
and low growth at home, as well
as the expectation of a rapidly
growing consumer market in
other african cities, which lacked
the formal retail long enjoyed by
south africans. But Game’s value
proposition has always been
challenging in african markets.
at home, consumers knew the
brand and it slotted into the retail
ecosystem alongside shoprite,
Makro and others. It was a
different story in other african
markets. Its pitch as discount
household goods and general
merchandise store was not clearcut
in countries such as Nigeria,
where people are used to
shopping for similar goods in the
huge markets that exist in all
major cities.
the prices at Game were not
necessarily competitive, nor was
the merchandise particularly
novel. Much of it was imported
from China, from where local
entrepreneurs also sourced their
goods. a similar situation exists in
Kenya where an estimated 70% of
shopping is in the informal
sector, known as the ‘kadogo’
economy, according to market
research firm Nielsen. this leaves
formal retailers scrambling for
the remaining 30%.
High rentals, low
spending power and
other challenges
the convenience of
comfortable, air-conditioned
shopping malls have its
attractions, but rentals are high,
which can result in
uncompetitive pricing even
within economies of scale
enjoyed by south africa’s large
retail chains. It is likely the south
africans have made incorrect
assumptions about the size of the
addressable market, shopping
habits and the likely disposable
income of consumers in african
markets. the south african retail
market is not a good indicator of
what lies north of Limpopo. Its
formal retail sector is much
bigger and more entrenched than
it is in any other sub-saharan
african country.
the size of the middle-class in
africa has been over-estimated by
strategists. While it has been
growing, many of those defined as
middle class by one or another
measure is at the unstable end of
the definition and prone to
disruption by economic shocks
like high inflation and low
growth as well as exogenous
shocks, such as the drop in the oil
price for crude-dependent
countries such as Nigeria and
even Ghana.
Game did not have strong
brand recognition in other
african markets and probably
assumed, as some other retailers
such as Woolworths did in other
countries, that its reputation as a
household name at home would
be enough. It chose not to rebrand
under the more recognised Wal-
Mart name after the Us giant
bought Massmart in 2010. the
look and feel of the stores, along
with the choice of merchandise
in them, has also been criticised.
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