Ghana: Fitch Revises Outlook from Negative

Fitch Ratings has today revised the Outlook on the Long-term foreign and local currency Issuer Default Ratings (IDRs) of the Republic of Ghana to Negative from Stable. At the same time, the agency has affirmed the Long-term foreign and local currency IDRs and the Country Ceiling at ‘B+’, respectively, and affirmed the Short-term IDR at ‘B’.


“The revision of the Outlook on Ghana’s ratings to negative reflects new data pointing to twin fiscal and current account deficits of 15% and 24% of GDP respectively in 2008 and double-digit inflation. The magnitude of these macroeconomic imbalances leaves Ghana poorly placed to navigate adverse global economic conditions and presents Ghana’s newly elected National Democratic Congress (NDC) government with some formidable challenges,” says Paul Rawkins, Senior Director in Fitch’s London-based sovereign rating team.


Parallels drawn by commentators between the dire state of the economy at the end of the 1990s and 2008 are somewhat overdone; nonetheless, left unaddressed Fitch believes that current imbalances could rapidly erode the benefits Ghana has gained from external debt relief.


External shocks have played their part in derailing Ghana’s relatively short track record of macroeconomic stability, but fiscal deterioration has been evident since 2006 with fiscal outcomes far in excess of budgeted shortfalls. Revenues were broadly on target in 2008, but expenditure overran by 24% reflecting higher wages and salaries, increased energy subsidies and pre-election spending.


Public debt rose to an estimated 56% of GDP in 2008 – twice the peer group median – from a low of 37% in 2006. Fiscal funding was met from a drawdown of the proceeds from a sovereign bond issued in 2007, privatisation receipts and increased domestic debt issuance. Rising inflation has shortened investors’ horizons and the share of short-dated paper in the outstanding stock of government securities had risen to 46% by end-2008 from 20% at end-2007, raising roll-over risks significantly.


With the economy displaying clear signs of overheating – annual credit growth was running at 44% in 2008 and inflation rose to 19.9% year-on-year in January 2009 – the Bank of Ghana raised interest rates to 18.5% on 24 February. Fitch expects tighter monetary policy to be matched by fiscal retrenchment: the 2009 budget is due to be announced within the next two weeks.


Nonetheless, it will take time to rebuild a track record of fiscal discipline and the 2009 fiscal deficit is unlikely to fall much below 8-9% of GDP without real expenditure constraint. In the absence of private capital inflows on the scale of 2008, Ghana will have to revisit more traditional sources of funding from bilateral and multilateral institutions, coupled with higher domestic borrowing.


As one of the first countries in sub-Saharan Africa to champion the cause of structural reform, Ghana continues to enjoy a reservoir of goodwill among the international community, while the smooth transition of power in the 2008 presidential/parliamentary elections, the second since 2000, has cemented the country’s reputation as one of the few genuinely functioning democracies in Africa. However, the new NDC administration’s mandate is weak – it holds only 114 out of 228 parliamentary seats – potentially complicating its pursuit of macroeconomic stabilisation.


Fitch acknowledges that the recent discovery of oil in Ghana, if properly managed, could enhance sovereign creditworthiness over time. However, considerable uncertainty surrounds the timing of production start-up – early indications point to late 2010 – and the agency cautions against continued fiscal laxity in anticipation of new oil-related revenues.

 In the near term, Ghana is facing tight fiscal financing constraints, exacerbated by the global credit crunch, while a weak balance of payments threatens to put further downward pressure on its currency and international reserves. Stronger fiscal discipline will be essential if Ghana’s sovereign creditworthiness is not to be put at greater risk.