Full statement: Moody’s trims outlook on Ghana’s sovereign rating to negative
Moody’s Investors Service has today changed the outlook on Ghana’s B1 government bond rating to negative from stable.
Concurrently, Moody’s has affirmed the government’s B1 issuer and bond ratings.
The key drivers of today’s rating action are the following:
1) The Ghanaian government’s weak fiscal fundamentals and rising debt levels, which reflect both continued spending overruns and relatively low revenue ratios compared with rating peers, despite rapid growth.
2) The weakening of Ghana’s external position on the back of large external imbalances and a low level of foreign-exchange reserves, which have increased the country’s susceptibility to event risk in view of the strong correlation between domestic economic activity and the global business and commodity cycles.
RATINGS RATIONALE
RATIONALE FOR CHANGE IN OUTLOOK TO NEGATIVE FROM STABLE
The primary driver informing Moody’s decision to change Ghana’s rating outlook to negative is the government’s ongoing weak fiscal position, which has led to a steep deterioration in its debt and debt-servicing ratios, despite rapid economic growth. Continued overruns on Ghana’s public-sector wage bill, high interest costs and the clearance of payment arrears are likely to result in a double-digit GDP budget deficit in 2013, having already recorded an 11.9% deficit in 2012.
In addition, the government has once again postponed the date by which it estimates that its budget deficit will be reduced to under 6% of GDP from 2015 to 2016, which coincides with the next general election. Given the sensitivity of government spending to election cycles, this timing could undermine fiscal consolidation plans and keep interest rate premia at elevated levels, particularly if oil/gas production and exports fail to expand as much as forecast.
As a result of the large fiscal deficits, the government’s debt-to-GDP ratio is forecast to reach an estimated 51.2% of GDP by the end of this year, up from 48.1% of GDP in 2012. Moreover, domestic financing pressures are intensifying, as evidenced by cedi-denominated bond yields approaching 20%. Moody’s notes that this higher risk premium could imperil the sustainability of government finances if maintained. Domestic debt-servicing costs in 2013 were almost 40% above the government’s budgeted level and now consume 20% of government revenues, according to figures released in the government’s budget in November.
While Ghana’s high debt-servicing costs are counterbalanced by the availability of financing from a multitude of sources, both domestic and external, as well as revenue-enhancing measures — such as the removal of fuel and electricity subsidies and tariff hikes — Moody’s notes that this has not been sufficient to offset spending overruns on wages and interest payments in particular.
The second driver behind the outlook change is Ghana’s weaker external vulnerability position in light of the current elevated fiscal and external deficits and the strong correlation of these positions to global economic, commodity and local electoral cycles. The decline in gold and cocoa prices — the country’s two most significant export products — has contributed to wider budget and current account deficits, thereby aggravating shortfalls driven by expansive fiscal and monetary stances.
Moody’s also considers Ghana’s fiscal and external finances to be highly susceptible to various internal and external shocks given the large debt refinancing needs and wide external imbalances, as well as the country’s modest fiscal and foreign-exchange reserves that could serve as buffers against such fluctuations.
RATIONALE FOR AFFIRMING GHANA’S B1 SOVEREIGN RATING
Several factors explain why Moody’s action on Ghana is limited to a change in outlook only, leaving the B1 sovereign rating unchanged. These factors include the country’s strong economic growth potential, its track record of political stability and depth of institutional capacity — areas in which Ghana is stronger than many of its rating peers. Moreover, the economic structure is more diversified than most single-B or Ba-rated peers, with the services sector contributing half of GDP. Moody’s expects that the government’s revenues relative to GDP are likely to reach and potentially surpass the median for this group in 2014. The main drivers of this development are the Ghanaian government’s steps to broaden the tax base and bring the VAT rate more into line with that of countries at a comparable level of development, thereby helping to gradually close the country’s fiscal gap stemming from outsized wage increases for public servants, and before taking into account higher oil/gas revenues that will come through later in the decade.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Downward pressure on the rating could arise from factors that include (1) sustained high or rising fiscal deficits and government debt burden; (2) a sustained decline in oil, gold or cocoa prices that would put downward pressure on fiscal revenues and export receipts; (3) diminished access to foreign investment or portfolio capital, which would elevate debt rollover risk and aggravate debt-servicing costs.
A return to a stable outlook on Ghana’s sovereign ratings could develop as a result of
(1) accelerated and sustained fiscal consolidation that would gradually reduce the government’s debt burden over the medium term;
(2) a substantial bolstering of Ghana’s foreign-exchange and/or fiscal reserves that would reduce the country’s vulnerability to domestic or external shocks;
(3) a strengthening of FDI inflows as a source of funding for the country’s external imbalance.
GDP per capita (PPP basis, US$): 3,316 (2012 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 7.2% (2012 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.8% (2012 Actual)
Gen. Gov. Financial Balance/GDP: -11.9% (2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -12.1% (2012 Actual) (also known as External Balance)
External debt/GDP: 29.1% (2012 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has
been recorded since 1983.
On 02 December 2013, a rating committee was called to discuss the rating of the Ghana, Government. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/framework, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has decreased. The issuer has become increasingly susceptible to event risks.
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