Strong dollar hits emerging market loans
Huge currency falls are driving up costs of dollar-denominated payments, leading to rise in middle-class mortgage defaults, repossessions
Isaac Buame felt his dreams had come true two years ago when he moved his family into a plush three-bedroom house in a gated-community east of the Ghanaian capital Accra. It was not until January that he began losing sleep.
The reason: a huge fall in the value of Ghana's cedi currency, which has more than doubled the cost of repayments on his US$90,000 mortgage, which he took denominated in US dollars to secure lower interest rates.
His monthly payment has risen to 2,620 cedis (HK$5.311), compared to 1,200 cedis two years ago, and he is contemplating giving up the house.
"It's become an albatross around my neck and it must go quickly for me to have my life back," Buame said.
His predicament highlights the challenges faced by consumers in emerging economies like Ghana as the strength of the US currency pushes up the cost not only of imports like cars and electronics, but also of dollar-denominated loans.
In Ghana, this is holding back the growth of a rising middle class by stunting the development of the mortgage market. It is also deterring private investors from funding the estimated 1.7 million new homes the government wants built in the next 10 years to address an acute housing shortage.
"The investments can only happen when the private partner is guaranteed a stable market and some predictability in the general economic outlook," said economist Sampson Akligo of Investcorp Ghana. "From what Ghana is experiencing, it appears the country is not there yet."
Ghana, which exports cocoa and gold, became one of the fastest-growing countries in the world in 2011, a year after it began commercial crude oil production from its offshore Jubilee field. The economy expanded by 14 per cent that year.
The oil start-up and attendant service sector growth fuelled a boom in demand for capital and consumer imports and drove up demand for dollars to pay for them.
But growth has slowed and is now projected at just 3.5 per cent this year. The government has been forced to sign a three-year aid deal with the International Monetary Fund to restore fiscal stability.
And the cedi's weakness has obliged Ghana's central bank to keep tightening monetary policy: the benchmark lending rate now stands at around 25 per cent, one of the highest in Africa, compared to 10 to 18 per cent in Kenya and Nigeria.
Expectations of a rate rise by the US Federal Reserve have kept the dollar strong and added to pressure on emerging currencies like the cedi. Ghana's currency has tumbled 20 per cent since January, adding to a 25 per cent drop last year.
An official at one of Ghana's leading mortgage lenders said repossessions were increasing.
"We recovered about 22 units last year out of which we sold 11," the official said. "It's obvious we'll be doing a bit more this year - not less than 30 houses in recoveries because of the economic conditions."
While the numbers are quite small, they are significant for the Ghanaian mortgage market, which was virtually non-existent 10 years ago and considered too high-risk by lenders.
Scores of householders are facing difficulties repaying their loans, according to industry sources.
The official's firm charges 13.5 per cent interest yearly on its dollar denominated mortgages and 29 per cent on cedi loans. It takes over houses when the holder accumulates more than three months of repayment arrears and fails to agree a renegotiation.
"Most of the houses involved are the gated-community type because that's what the majority of the middle-class people want."
Until the recent economic downturn, Ghana's average yearly growth of 7 to 8 per cent of gross domestic product led to a burgeoning middle class of consumers like Buame, a manager at a state company.
"I can hardly sleep because the cedi keeps falling and my monthly repayment keeps rising almost every quarter," Buame said of his mortgage.
"I am now distressed and its beginning to affect my family," said Buame. Several attempts to get a refinancing from a third party for the property did not materialise, he added. Interest rates for a loan in cedis would be too high.
"The rates are beyond reach. It's like jumping from a frying pan to a fire."