London- February 15, 2013 – Fitch Ratings has revised the Outlook on Ghana’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed them at ‘B+’. The agency has also affirmed the Short-term IDR at ‘B’ and Country Ceiling at ‘B+’.
KEY RATING DRIVERS
The revision of the Outlook to Negative reflects the following factors:
– The severe deterioration in the fiscal deficit to 12.1% of GDP in the run up to the December 2012 election. This is nearly double the government’s target of 6.7% set in July’s supplementary budget and well above the initial budget of 4.8% agreed at the start of the year. The deterioration suggests a serious loss of fiscal control and reduced credibility.
– The government has funded the budget deficit mainly through borrowing at high interest rates on the domestic market, at 22.8% for 91 day t-bills. While current expenditure has surged, the share of capital expenditure has fallen, which could harm longer-term growth prospects and worsen debt dynamics.
– As a result of the worse-than-expected fiscal outturn, government debt has risen to 47% of GDP in 2012, up from 31% of GDP at the time of the 2008 elections and above similarly rated countries (‘B’ category median 44% of GDP) despite strong growth and high commodity prices.
– There are downside risks to the medium-term fiscal outlook. The final 2012 deficit outcome could be higher than the initial estimate. The government’s fiscal plans are unknown as it will only announce its 2013 budget target in March. Risks to fiscal consolidation include high bond yields, arrears build up in Q412, higher fuel subsidies and potential further slippage from the continued implementation of the new public salary structure.
– The blow-out in the budget deficit will have worsened the current account deficit, which Fitch estimates increased to 12.9% of GDP in 2012 from 8.6% in 2011, heightening external vulnerabilities.
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade:
– Failure to set out and implement a credible fiscal consolidation plan as well as improve expenditure control.
– A material increased in external vulnerability related to the large current account deficit, such as declining or volatile capital inflows and falling reserve cover.
The current rating 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 ambitious but realistic fiscal consolidation plan and evidence that this is being effectively implemented, as well as reforms to strengthen fiscal control.
– Over the medium term, the new oil and gas sector has the potential to boost Ghana’s economic output, diversify the economy and strengthen the country’s public and external balance sheets. All these factors should eventually strengthen Ghana’s creditworthiness.
Ghana’s ‘B+’ rating is based on Fitch’s assumption of a marked reduction in the budget deficit after the election-related blow-out in 2012.
It projects a narrowing in the deficit to 8% of GDP in 2013 and 5% of GDP in 2014, reflecting a combination of real expenditure restraint, particularly on current expenditure, as well as continuing robust revenue growth. However, the government will not announce its fiscal consolidation plans until the March budget.
Fitch assumes that the 2012 fiscal outturn will be in line with provisional estimates. However, significant risks arise from higher-than-expected arrears, expenditure carryover from 2012 as well as the poor expenditure control seen in Q412.
Fitch assumes Ghana’s GDP growth remains robust, in excess of 7%. Growth prospects will depend on oil production coming on stream as anticipated, increasing to 120,000b/d in 2013 and to 600,000 by 2018; the continued development of the gold sector; and further investment in infrastructure. On this basis, key debt ratios are eventually expected to stabilise around current levels.
Favourable growth forecasts and a sustainable external position assume favourable terms of trade with no sustained deep fall in commodity prices, particularly gold, cocoa and oil which together make up 83% of exports.
A special report focusing on the budget and the prospects for government finances entitled ‘Ghana: The State of Public Finances’, will be published shortly.