FACTBOX: Political risks to watch in Ghana

The start of commercial oil production in 2010 has helped promote Ghana into the ranks of the world's lower middle-income nations, fuelling hopes of ending a dependence on aid and forging a future as one of Africa's star economies. While President John Atta Mills's government is seen to have done well in knocking public finances into shape since 2008, elections are due in December and the country's deficit is being strained by a high wage and fuel subsidy bill.

The Bank of Ghana is tightening monetary policy to fend off mounting inflation pressures and stabilise the sliding cedi currency.

Here are the main political risks Ghana faces:

RESOURCES

UK-listed operator Tullow Oil is talking of more than two billion barrels of oil reserves under offshore Ghana, following discoveries in the Jubilee oil field.

Aside from the state-owned Ghana National Petroleum Corporation (GNPC), Tullow's major partners in Jubilee are U.S. producer Anadarko Petroleum and U.S. public energy firm Kosmos.

The partners originally aimed for output of 250,000 barrels per day by 2013, putting Ghana among the world's top 50 producers. Tullow said on May 3 it would probably ramp up production to a delayed first-phase plateau target of 120,000 barrels per day next year. Currently, Jubilee is producing 70,000-90,000 barrels per day.

Ghana is the world's second largest cocoa producer behind Ivory Coast. After raising its output forecast for 2011/2012 to around one million tonnes, sector regulator Cocobod now says it could be lower than that due to bad weather. Declared purchases to May 24 were 775,761 tonnes.

Cocobod is also investigating a shortfall of about 70,000 tonnes of beans between official cocoa purchases and its inventory after buyers reported inflated volumes. The International Cocoa Organisation has projected Ghana's output for this year at 970,000 tonnes.

Cocoa prices fell to three-year lows by late-2011 as investors dumped commodities amid the European debt crisis, but have since moved upwards.

Spot prices of gold, of which Ghana is the second largest African producer after South Africa, rose strongly in 2011 due to the euro zone crisis but have since edged back as the dollar has strengthened.

What to watch:

- Any new read-out on progress of work towards Tullow's new target of 2013 for reaching first-phase plateau production of 120,000 barrels per day from Jubilee.

- Commodities markets, especially cocoa. They in turn are dependent on expectations for the remainder of Ivory Coast's season.

- What becomes of Cocobod's probe into the discrepancy between declared purchases and the official inventory and what measures are put in place to prevent recurrence. Will this be enough to hurt Cocobod's credibility in the eyes of international banks which provide it with credit for annual crop purchases? Cocobod is seeking $1.5 billion in a fresh syndication to be held in September for 2012/13 crop purchases.

ECONOMY AND PUBLIC FINANCES

In its bleakest warning yet, the Bank of Ghana on April 13 warned that the depreciation of the cedi - which has fallen over 15 percent against the dollar this year so far on a surge in demand for imports - "could act to offset the gains made in macroeconomic stability".

The statistics office announced on June 13 that inflation rose to 9.3 percent in May, from 9.1 percent in April, mainly due to the depreciation of the cedi.

The bank then hiked its key interest rate further by 50 basis points to 15 percent after raising it twice previously by 100 basis points as part of monetary tightening in support of the cedi and against inflation risks.

The bank also introduced short-term bills and changed bank reserve and asset requirements, as well as issuing medium-term bonds.

On the fiscal front, higher-than-expected wage claims and the continued cost of fuel subsidies means Ghana could struggle to stick to a 2012 deficit target of 5.2 percent of national output excluding oil.

The International Monetary Fund has called on the government to remove the fuel subsidies and tighten policies to keep inflation in line with its 8.5 percent end-of-year target. It is estimated that Ghana spends 60 million cedis ($31.41 million) a month on fuel subsidies.

Finance Minister Kwabena Duffuor said the government was barring public institutions from spending plans that were not included in the 2012 budget in a bid to ensure fiscal discipline ahead of elections later this year.

What to watch:

- Measures announced by the central bank to stabilise the cedi appear to be taking effect, but very slowly. How long will the measures take to revive the interbank market which is currently dormant, mainly because of lack of liquidity?

- The government will come under pressure from sections of the 450,000-head public sector for wage hikes. Will it buckle?

- Ghana agreed a $13 billion credit facility with China back in 2010. To what extent will it be tempted to draw on that and on what terms?

- The government says negotiations were completed for the disbursement of the first $3 billion - mainly for oil and gas infrastructure building, and that talks have begun on another $6 billion that it hopes to invest in social amenities.

- Investment in the Ghanaian economy has been hit by the euro zone debt crisis which made many investors more risk-averse. But yields which have significantly gone up since December could start to attract investors back.

POLITICS

Ghana is one of the more stable nations in the region, with a solid record of power changing hands peacefully. As has been the case since 1992, the 2012 presidential and parliamentary elections will be a race between the ruling National Democratic Congress (NDC) and the New Patriotic Party (NPP).

However, a recent exercise to compile a new voter register saw pockets of violence and intolerance, with ethnic undertones, by political activists against opponents.

The NDC overwhelmingly endorsed Mills as second-term candidate in the poll that will set him against the NPP's Nana Akufo Addo, whom he narrowly beat in December 2008.

What to watch:

- Registration violence. Is this a sign of growing intolerance in the political scene that could mar Ghana's good credentials in the upcoming polls, or is it limited to the registration exercise? Investors will be watching.

- The public sector. Migration to the Single Spine Salary Scheme (SSSS) for 470,000 public sector workers has been fraught with discrepancies, leading in some instances to long strikes by health professionals. Further trouble may count against Mills on voting day.

- Fraud charges. The state anti-graft agency has indicted a so-called financier of the ruling party for using fraudulent representation to the courts to obtain a pay-out of about $30 million. Two ministers have lost their jobs over the case, which has severely embarrassed the government. This is expected to be a campaign issue against the ruling party.

- Impact of the 2012 budget. The budget uses about 17.5 billion cedis of spending to develop infrastructure and boost jobs. Its success - or otherwise - in achieving those goals will be a key factor in how Ghanaians vote.

- Jerry John Rawlings. Despite peace efforts by party elders, the relationship between former long-time ruler and NDC heavyweight Rawlings and Mills remains frosty. Can this be mended before the elections? Rawlings and his flamboyant wife, who was Mills' opponent in the ruling party's primary last July, remain heavyweights in the political fortunes of the NDC and can still make things awkward for Mills.

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