Frontier Friday: Ghana Downgraded, Outlook Negative
Fitch Ratings in March affirmed Ghana’s long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B’ and placed a “negative outlook” on the West African nation. Ghana a major cocoa and gold producer, has not been immune to the global commodities slump rattling many other developing markets on the sub-continent.
The country’s fiscal and external deficits have left it “vulnerable to domestic and external shocks”, the agency said in its ratings rationale, including low oil prices and tight financing conditions. The result has been lower growth (4.1% in 2015), and a public debt to GDP ratio of 72%, well above the ‘B’ median of 47%. Fitch is also forecasting that economic growth will increase to 5.4% in 2016 and that public debt will peak this year. But a number of downside risks still remain. Fiscal slippage, for example, ahead of the November presidential elections would increase inflationary and financing pressures. Any more declines in commodity prices would also negatively impact growth and “exacerbate” Ghana’s twin deficits, Fitch said.
Progress has been made on fiscal consolidation in Ghana, with notable milestones made in 2015. For example, the narrowing of the fiscal deficit to an estimated 7.2% of GDP, from 10.2% in 2014. The country’s fiscal reform agenda is supported by an $18 million US-dollar Extended Credit Facility arrangement with the IMF, of which Ghana successfully concluded its second review in January of this year. The Fund’s program helped the government keep expenditures in line with revised 2015 budget while earning revenues in excess of what was forecast in the budget. The 2016 budget calls for a further narrowing of the deficit, to 5.3% of GDP. However, Fitch believes that the narrowing will be smaller and forecasts a 2016 fiscal deficit of 6.3%.
The 2016 growth outlook is dependent on a combination of domestic and external factors. Domestically, oil and gas production will increase as the Tweneboa, Enyenra and Ntomme oil fields come online in August and add 23,000 barrels per day in oil production, Fitch explains. Externally, however, lower global commodity prices, oil and gold in particular, would damage export receipts.
Downward pressure on the exchange rate and overall foreign exchange volatility has also served to dampen growth and increase external pressure. But in Fitch’s view, the Ghanaian cedi will experience greater stability in 2016 and lower levels of depreciation. The agency expects the cedi to trade at an average exchange rate of 4.1/USD; this would be a depreciation of about 8% from the 2015 average compared with the 22% depreciation that the cedi experienced in the previous year.
Currency and Policy Converging
In its most recent Monetary Policy Committee (MPC) meeting, the Bank of Ghana (BoG) decided to keep the monetary policy rate at 26%, where it sits after five rate hikes in 2015. The MPC noted that exchange rate stability had contributed to February’s slight drop in inflation to 18.5%, from 19% in January. Inflation expectations remain high, and the current level gis still well above the target band of 8+/- 2%. For these reasons, Fitch expects the central bank to maintain a relatively tight monetary policy in 2016, which will be supportive of greater price and exchange rate stability.
The depreciating exchange rate, said Fitch, has also led to a deterioration in the asset quality of the Ghanaian banking sector. The ratio of non-performing loans (NPL) to total loans increased from 11% in June 2015 to 14% by October. “Increasing NPLs are a risk, but overall the Ghanaian banking sector remains liquid and well-capitalized,” Fitch said.
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