Ghana most vulnerable to tightened global liquidity – Fitch

dollarsGhana is among three African nations in sub-Saharan Africa (SSA) that are most vulnerable to risks due to the tightening of liquidity conditions in the global financial markets, ratings agency Fitch said today October 2, 2013.

The country’s vulnerability is due its reliance on short-term capital flows to finance large current account and budget deficits, Fitch noted in a new report adding that Kenya and South Africa also suffers such problem.

Ghana in July this year went to the international market to raise an amount of $750 million from a $1 billion Eurobond issue. The Eurobond, Ghana’s central bank said has increased the country’s foreign debt portfolio to $10.2 billion.

Ghana recorded a current account deficit of $2.3 billion in the first half of 2013, and budget deficit of 6.3% in the first seven months of the year, according to the Bank of Ghana.

According to Fitch’s report titled “Sub-Saharan Africa To Weather US Fed Tapering”, it expects Ghana’s deficit to be 10.3% for the year 2013 against the target of 9% set by the Government.

“Ghana is also exposed, with an expected budget deficit of 10.3% of GDP for FY13, funded largely by domestic debt issuance (68%), of which foreigners hold around 26%,” said the report.

On Kenya and South Africa, Fitch estimates the current account deficit less foreign direct investment (FDI) will be 10.5% and 4.6% of GDP respectively, with the deficit 80% and 30% funded, respectively, through short-term capital flows into bonds and equities.

Fitch indicated that Ghana, South Africa and Kenya are not alone among SSA in having large current account and budget deficits, but vulnerability is mitigated in other countries.

“For example, in Mozambique much of the current account deficit is financed through FDI, while Rwanda receives substantial concessional funding. Foreign participation in smaller markets like Uganda and Zambia has largely been driven by movements in domestic interest rates, making these markets less vulnerable to Fed tapering,” it added.

On average, however, the ratings agency is of the view that the SSA region will be “less vulnerable to eventual Fed tapering and ultimately monetary tightening than more mainstream emerging markets”.

This, Fitch added is due to lower external financing requirements and the largely non-concessional nature of African nations’ foreign debt.

It further explained that the region is also shielded by financial markets which are not as globally integrated and improved reserve cover.

Fitch mentioned that stronger growth prospects, supportive of foreign direct investment will also provide a needed buffer for the region.

As a result, it [Fitch] does not expect eventual Fed tapering to place significant pressure on SSA countries’ domestic and external financing capacity.

By Ekow Quandzie

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