The rating published December 20, 2012 says Moody’s has assigned “local- and foreign-currency issuer ratings of B1 to the government of the Republic of Ghana. The ratings have a stable outlook.”
According to Moody’s the main drivers of the rating are the country’s robust growth prospects supported by foreign investment in gold mining, petroleum and gas sectors.
Moody’s says it expects Ghana’s robust growth prospects, driven by the gold mining, petroleum, cocoa and domestic service sectors to be in the 7-8% range for 2012-14 after exceeding 14% in 2011, indicating that medium-term growth prospects are further supported by Ghana’s ability to attract foreign direct investment into the mining and hydrocarbon sectors.
In Moody’s estimation the commercialisation of recent oil and gas discoveries will fundamentally transform the Ghanaian economy, accelerating growth while global energy prices remain supportive.
“Ghana’s relatively diversified economy and robust domestic demand also enhance creditworthiness, but are balanced by a low per capita income relative to B1-rated peers,” it says.
Even though Moody’s asserts that Ghana’s moderate institutional strength and democratic track record, together with a history of political stability and low inequality in incomes relative to other B1-rated peers such as Kenya, Mongolia, Sri Lanka, and Zambia, has contributed to the stable outlook, it however, observes that the Ghanaian government’s policy execution has been weakened by inadequate control over public financial management.
“Moreover, election cycles tend to have an exaggerated impact on spending and fiscal leakages, which are exacerbated by the absence of consolidated budget administration. This has resulted in a build-up of arrears, primarily to public-sector workers and government-related enterprises, as well as frequent contract violations leading to compensation judgments against the government,” it says.
It also contends that policy predictability has been further undermined by recent changes to the tax regime for the gold mining industry, which, while expanding the government’s revenue base, have adversely affected the business climate for foreign investment.
Moody’s notes that another driver informing its assignment of a B1 sovereign rating for Ghana are the country’s weak fiscal fundamentals.
“Ghana benefitted from multilateral debt forgiveness in the mid-2000s, but debt has since escalated to 44% of GDP in 2012 from 26% in 2006. The dramatic deterioration in the government’s balance sheet in the run-up to the December 2012 election leads Moody’s to expect the fiscal deficit to exceed 9% of GDP this year, driven by elevated spending and a deceleration in revenue growth,” it says.
Moreover, Ghana’s improved tax performance in 2012 has been more than offset by elevated current expenditure on goods and services, the carry-over of commitments from 2011, increased wages and subsidies (particularly for fuel imports), the clearance of arrears, and rising interest expenditure due to a 20% depreciation of the currency earlier this year, the ratings agency adds.
It also says Ghana’s high debt-servicing costs relative to peers is balanced by the availability of financing from a captive domestic investor base, access to international capital markets, and the availability of concessional loans and grants from multilateral and bilateral sources.
Looking ahead, Moody’s says it expects the fiscal situation to improve in 2013-14, assuming that global commodity prices remain stable.
“In addition to greater revenues from the oil sector, several structural trends will provide positive momentum to fiscal metrics going forward, including growth in non-oil tax revenue, a moderation of expenditure pressures that built up in 2012, and the clearance of arrears,” adding that, “However, a retrenchment of subsidies and transfers to public corporations is unlikely to materialise unless imposed by a new IMF programme — the previous three-year engagement through mid-2012 enforced fiscal discipline and placed limits on external borrowing.”
The stable outlook for the B1 rating Moody’s says, reflects its expectation of continued strong economic growth and an improvement in the government’s financial position, balanced by elevated financing needs, a relatively high level of debt, and limited buffers against external shocks.
By Emmanuel K. Dogbevi