Frontier Friday: Ghana Ratings Affirmed With “Negative” Outlook
Fitch Ratings in September affirmed Ghana‘s long-term foreign and local currency issuer default ratings (IDRs) at ‘B’ with negative outlooks. The issue ratings on Ghana‘s senior unsecured foreign and local-currency bonds have also been affirmed at ‘B’. In addition, the rating on Ghana‘s 1-billion dollar partially guaranteed note has been affirmed at ‘BB-‘. Ghana‘s country ceiling and short-term foreign and local currency IDRs have been affirmed at ‘B’.
Ratings factors, according to the agency, reflect the progress Ghana is making in fiscal consolidation and macroeconomic stabilization under its current International Monetary Fund (IMF) program. However, “substantial downside risks remain,” Fitch says.
Ghana’s general government debt was high at 72% of GDP at end-2015, well above the ‘B’ median of 54%. Debt/GDP has increased rapidly from 47% at end-2012 debt, reflecting persistent budget deficits and exchange rate depreciation (64% of debt is denominated in foreign currency), but Fitch forecasts it to decline slightly to 69% at end-2016.
Fitch forecasts the general government deficit to narrow to 5% of GDP in 2016, below the original budget target of 5.3%. This represents significant fiscal consolidation from a deficit of 6.3% in 2015 and 10.2% in 2014. The adjustment has been even stronger in accrual terms as the government has been paying down its stock of arrears.
However, Ghana‘s presidential and parliamentary elections, scheduled for December 7th, “represent a downside risk in view of the last elections in 2012 when the fiscal deficit widened to 11.6% of GDP from 4.1% in 2011 and the government ran up substantial payment arrears.”
Ghana‘s extended credit facility with the IMF of 915-million is a also providing key support for the ratings, as it allows the country access to external financing at concessional rates and provides an anchor for “policy discipline,” says the agency. A second review of the program was concluded in May and the third review is currently underway. However, the third review was delayed owing to the Fund’s concerns about outstanding SOE debt and a law passed by Ghana‘s Parliament allowing central bank financing of the government up to 5% of the previous year’s revenues.
Growth in the country is expected to pick up slightly in 2016 to 4.1% according to Fitch’s forecasts, from around 3.9% in 2015. This, the agency says, represents a downward revision to its previous growth forecast, owing to widespread electricity shortages through to July and technical problems at Ghana‘s Jubilee oil field.
Fitch forecasts growth to strengthen to 6.3% in 2017 and 7% in 2018, supported by gains from macroeconomic stabilization and the coming online of additional oil and gas production at the TEN and SGN fields. Robust growth potential is an important rating strength.
State-owned energy companies have reached an agreement to restructure around 1.3billionUSD (3% of GDP) of debt they owe to the Ghanaian banking sector, which Fitch views as a contingent liability to the sovereign. The SOE non-payments (along with cedi depreciation and the slowdown in growth) were the main cause of a sharp rise in the NPL ratio to 19.3% of loans in May 2016 from 14.7% at end-2015. Deteriorating asset quality remains a risk to Ghanaian banks, but overall, the sector remains liquid and well-capitalized. Ghana scores a ‘3’ on Fitch’s macro prudential indicator, reflecting rapid growth in credit between 2011 and 2014.
Ghana overall has had a history of largely free, fair and peaceful elections since the end of military rule in 1992. However, opinion polls suggest it will be a close contest between the ruling National Democratic Congress (NDC) and the New Patriotic Party (NPP), increasing the tail risk of dispute. Fitch states it does not expect a major change in economic policy after the elections as both parties have supported the current economic adjustment program under the IMF.