Fitch Ratings has affirmed Ghana’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B’ with Negative Outlooks. Fitch has also affirmed Ghana’s Short-term foreign currency IDR at ‘B’ and Country Ceiling at ‘B’. The issue ratings on Ghana’s senior unsecured foreign and local currency bonds have been affirmed at ‘B’.
KEY RATING DRIVERS
The affirmation reflects the following factors:
The IMF board is expected to approve Ghana’s USD940m Extended Credit Facility in April, which should provide some easing of severe external and fiscal financing pressures. However, Ghana’s track record of increasing spending ahead of the elections in 2008 and 2012 raises concerns about the government’s ability and willingness to meet the ambitious fiscal consolidation targets set out by the IMF.
The IMF programme is intended to provide financing, policy direction and monitoring and addresses Ghana’s key credit weakness through prioritising fiscal consolidation, raising revenue and improving Central Bank credibility. Ahead of the programme, the authorities have introduced VAT on petroleum products, agreed to a modest public sector wage increase as well as maintaining the National Fiscal Stabilisation Levy and a special import levy. Commitment to the programme should result in a recovery of donor inflows, foreign investment in the domestic bond market and reduce domestic funding costs over time.
Fiscal consolidation proved challenging for a second consecutive year in 2014, with revenue underperformance resulting in a higher than targeted deficit of 9.4% of GDP (8.5% in the budget) and well above the ‘B’ median of 4.8%. In response to lower oil prices, the Minister of Finance released a revised budget in mid-March. To compensate for lower revenue, expenditure on goods and services as well as capital projects has been reduced. The government expects the deficit to narrow to 7.5% of GDP in 2015. This is higher than the deficit target of 6.5% announced in the 2015 budget in December 2014. The projected fiscal deficit is consistent with the agreements reached with the IMF.
Fitch forecasts a fiscal deficit of 8% of GDP in 2015, due to continued revenue underperformance. The IMF projects that the deficit will narrow to 3.5% of GDP by 2017. Fitch considers this too optimistic given the deepening electricity crisis, which could drag growth lower, as well as the pressure that the upcoming elections will likely exert on spending.
Rising government debt, which increased to 67% at end-2014 from 47% in 2012, combined with increased reliance on domestic debt (45% of total), where yields have averaged 23% since mid-2012 has led to a steady rise in the interest burden. Interest costs as a percentage of GDP rose to 7% in 2014 from 2.5% in 2011 and now account for one-third of government revenue, the highest of Fitch-rated sub-Saharan African sovereigns.
Ghana’s external position is vulnerable. Gross international reserves fell to USD4.9bn or 2.9 months of current external payments (CXP) in January 2015 from USD5.5bn at end-2014, partly due to increased seasonal demands for foreign exchange. Stripping out swap facilities, reserves cover only 1.9 months of CXP. The cedi has continued to depreciate sharply, falling 10% since January 2015, and news of a potential IMF programme has done little to support the currency. With 55% of the debt stock denominated in foreign currency, this external vulnerability could be quickly transmitted to the public finances.
Ghana’s growth prospects have been undermined by its fiscal and external imbalances. Fitch expects GDP growth to moderate to 3.4% in 2015 against an average of 8.6% for the previous five years and well below the ‘B’ median. Growth is being dragged lower by a severe power crisis and macroeconomic instability. Weaker growth will in turn complicate fiscal consolidation.
Ghana scores MPI 3 in Fitch’s Macro Prudential Risk Monitor – signalling a high level of potential systemic risk – due to the sharp acceleration in credit growth in 2014 to 40% y-o-y. The increase is concentrated in the electricity sector and financial services, and partly reflects the impact of cedi depreciation on trade finance loans, particularly oil imports. Credit growth is expected to moderate this year, but the extent will depend on whether the cedi depreciates further and the need to finance fuel imports.
A decade of growth above 7% has resulted in an improvement in social indicators. However, per capita income and measures of human development are still weak relative to ‘B’ peers. Per capita income of USD1,445 in 2014 is 40% of the ‘B’ median. The ratings are supported by Ghana’s strong governance record and long democratic history.
RATING SENSITIVITIES
The main factors that individually, or collectively, could trigger negative rating action include:
-A further deterioration in external finances and an erosion of Ghana’s international reserve position, jeopardising the country’s external financing capacity.
-Increased domestic financing constraints, further deterioration in fiscal accounts and government debt dynamics.
– Worsening economic performance and reduced economic stability.
The Outlook is Negative. Consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
-An effective fiscal consolidation that places debt-to-GDP firmly on a downward trajectory.
– An improvement in Ghana’s external position reflected in a narrowing of the country’s current account deficit and an improvement in international reserves.
KEY ASSUMPTIONS
Fitch assumes Ghana’s GDP growth will recover to 5% in 2016. This in turn will depend on oil production coming on stream as expected; the continued development of the gold sector; and further investment in infrastructure.
Fitch assumes an IMF programme is approved and fiscal consolidation continues.
Fitch assumes no sustained deep fall in commodity prices that would undermine an already weak external position.
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