Posted: Monday 31st March 2014 at 16:31 pm

Ghana Downgraded Again

A recent rating by Fitch, an international credit ratings agency, casts doubt on the ability of Government to service its debts in the future after revising the outlook on Ghana’s rating from stable to negative.

According to the agency, which premised its assessment on Ghana’s long-term foreign and local currency Issuer Default Ratings (IDR), Ghana’s fiscal position worsened further over the past six months, confirming the crisis situation painted by Dr Mahamudu Bawumia, Visiting Professor of Economics at the Central University College in his recent public lecture.

Although it respectively affirmed the country’s rating, short-term foreign currency IDR and country ceiling at ‘B’, it said revenue underperformance and intractable expenditure on wages and interest led to a budget deficit of 10.8 percent of GDP in 2013, wider than Government’s target of 9 percent.

Debt Now 61.6% of GDP

According to Fitch, a sharp 20 percent depreciation of the exchange rate has additional caused government debt to rise to 61.8 percent of GDP in 2013 from 48.9 percent in 2012.

It also affirmed the issue ratings on Ghana’s senior unsecured foreign and local currency bonds at ‘B’.

Deficit financing

Noting that Ghana’s current account deficit widened to 13.7 percent of GDP in 2013, with the balance of payments recording a deficit of $1.1 billion, it pointed out that financing the deficit was becoming increasingly challenging and costly, with yields on T-bills and one-year bonds jumping to 23 percent at the latest auction.

But Government, which was reported to have opted not to issue the five-year debt due to punitive rates on offer, expressed its preparedness to issue the 2014 Eurobond as planned.

It said it received approval last week from the Public Procurement Authority (PPA) to appoint transaction advisors for that.

To confirm this, President Mahama, despite warnings by concerned economists not to borrow, emphasised at the inauguration of a water project at Kyebi in the Eastern Region that his administration would embrace more borrowing for productive ventures.

Slower fiscal consolidation forecast

Furthermore, Ghana’s 2014 budget again aims for limited fiscal consolidation while it targets a deficit of 8.5 percent of GDP and defers by a year (until 2016) its target deficit of 6 percent of GDP.

But Fitch maintained that the pace of fiscal consolidation will be slower than the government projects. This reflects a divergence in views on the government’s capacity to significantly expand the revenue base. Containing current expenditure as well as curtailing arrears will also remain a challenge. Fitch forecasts a deficit of 9.3 percent of GDP for 2014, narrowing to 8.2 percent in 2015.

Chartered Bank Report

Coming on the heels of the Fitch report is a warning by Standard Chartered Bank, in its latest Africa Focus report.

It warned that Ghana risks running into serious financial distress unless Government makes an urgent efforts to cut spending.

“Ghana faces great challenges in the near term. Symptoms of financial distress are rising. The Ghanaian cedi (GHS) has depreciated rapidly, touching 2.67 at the end of March from ¢2.30 at the beginning of 2014. “Despite Bank of Ghana (BoG) measures aimed at improving supply of foreign exchange, and a clampdown on dollarisation, a large amount of foreign exchange demand remains unmet at current exchange rates. The market shortage is estimated at US$1.2 billion. Were the foreign exchange market to clear, the cedi would likely come under even greater pressure.”

It stated that CPI inflation accelerated to 14 percent year-on-year in February, well above the BoG’s target of 9.5 percent +/- 2 percentage points.

“Following much-needed fiscal consolidation measures, prices have been subject to further upward pressure. Fuel subsidies were lifted last year and are now adjusted bi-monthly; utility subsidies were cut, and the authorities raised the VAT rate.

“While these measures have contributed to higher prices in the near term, most of the pressure stems more fundamentally from Ghana’s expansionary fiscal stance.”

The report also said a 200 basis points rate hike by the BoG in February, which put the prime rate at 18 percent, was largely ineffectual in attracting new capital inflows to Ghana. This was partly because of investor fears that the currency will weaken further, and reservations about the fiscal outlook.

What does Ghana need to do?

“Despite an improvement in public financial management, consistent negative fiscal surprises have eroded investors’ faith in Ghana.

A new IMF programme might help credibility, but spending cuts are also needed. With expenditure on public-sector salaries accounting for more than 70 percent of revenue in 2014, Ghana has little choice: public-sector salaries must be made a key target for fiscal reforms.

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