Fitch Revises Outlook on Ghana to Stable: Affirms at ‘B’

Fitch Ratings has revised the Outlook on Ghana’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to Stable from Negative and affirmed the IDRs at ‘B’. Fitch has also affirmed the issue ratings on Ghana’s senior unsecured foreign and local currency bonds at ‘B’, as well as the ‘BB-‘ rating on Ghana’s USD1 billion partially guaranteed note. Ghana’s Country Ceiling and Short-Term Foreign and Local Currency IDRs have been affirmed at ‘B’.

The revision of the Outlook on Ghana’s IDRs reflects the following key rating drivers:

Ghana is making progress in stabilising its economy after its recent crisis period, with an expected revival in GDP growth, declining inflation, a more stable currency and increasing foreign exchange reserves. Furthermore Fitch judges that the new government will make progress in reducing the budget deficit after the election-related slippage in 2016, albeit with continued downside risks. Fitch expects growth to improve to 6% in 2017 from an estimated 3.6% in 2016, when it was hampered by lower than expected oil production and power cuts. CPI inflation fell to 12.9% year on year in March, from a peak of 19% in March 2016. The cedi has recovered to 4.2/USD, after depreciating to 4.7/USD in early March. The improvement in the macroeconomic environment has allowed the Bank of Ghana to cut its policy interest rate to 23.5% from a peak of 26% in 2016. Further, rising oil production and the benefits from macroeconomic stability will support Ghana’s medium-term growth potential above 6%, a key rating strength.

Ghana experienced a blow-out in the 2016 budget deficit, which widened to an estimated 8.9% of GDP (on a cash basis) in the run-up to December general elections, compared with a government and IMF target of 5.3%, and an outturn of 6.3% in 2015. The cash deficit includes up to USD1.3 billion (3% of GDP) in off-budget and unapproved spending. On a commitment basis, accounting for an additional USD650 million in unpaid commitments, Ghana’s deficit widened to as much as 10.5% of GDP. Fitch notes that some of the unapproved expenditure is presently being audited and a significant chunk may be written down, which would lower the deficit.

The election resulted in a win for the New Patriotic Party, Ghana’s centre-right party, which had been in opposition since 2009. In March, the new government announced its 2017 budget, which calls for fiscal consolidation, and measures to strengthen public financial management. Fitch forecasts the 2017 budget deficit to narrow to 7.5% of GDP on a cash basis, and further to 5.5% in 2018. The government’s 2017 deficit forecast of 6.5% of GDP is based on an expected increase in tax revenues and a cut to capital expenditures. Fitch believes that the expected increase in tax revenues will be difficult to realise, as the budget contains significant tax cuts aimed at boosting the business climate. Fitch notes that Ghana has historically underperformed its budgeted revenue projections.

On the expenditure side, interest costs will continue to exert upward pressure. Ghana’s interest costs are 32% of its general government revenues, a level well above the ‘B’ median of 9%. Also, a lack of transparency and accountability within the line ministries has persistently led to substantial off-budget spending and the accumulation of arrears. Successful implementation of the measures outlined in the Public Financial Management Act, 2016 would help control expenditure and keep spending focused on the policy priorities outlined in the budget. Gross general government debt has stabilised, experiencing a slight increase to 73% of GDP at end-2016, from 72% at end-2015. Fitch expects the debt/GDP ratio to decline to around 71% by end-2017 due to strengthening of the exchange rate (62% of debt is foreign currency denominated), lower budget deficit and robust nominal GDP growth. However, Ghana’s debt level will remain higher than peers both as a percentage of GDP (the ‘B’ median is 56% of GDP) and as a percentage of revenue. Ghana’s general government debt/revenue is 366%, compared with the ‘B’ median of 225%.

Ghana’s USD915 million Extended Credit Facility (ECF) with the IMF is a key support for the sovereign ratings. The incoming government has signalled its commitment to complete the programme, but has engaged with the Fund in renegotiating some of the programme’s indicative targets and structural benchmarks. IMF staff completed the fourth review of the ECF in March and it will go to the IMF Board for approval before the end of June, allowing for the dispersal of an additional USD116 million. Fitch believes that the government remains committed to successfully completing the current programme, which is due to run until 2018.

Ghana’s ‘B’ IDRs reflect the following key rating drivers:

Ghana’s external finances are a rating weakness. Fitch forecasts the current account deficit to narrow slightly to 6.3% of GDP in 2017, from 6.7% in 2016, but remain above the ‘B’ median of 5.7% of GDP. Increases in oil and gas exports will help Ghana’s export performance, but rising imports will keep the current account deficit from narrowing significantly. International reserves increased by USD460 million in 2016, ending at USD4.9 billion, about 2.8 months of current external payments. Fitch expects that external debt payments due in 2017 will limit reserves accumulation and forecasts reserves to reach USD5.2 billion at end-2017.

The ratings are supported by World Bank governance indictors and business environment indicators that are stronger than the ‘B’ median, underlined by the peaceful transition of power in December. However, the ratings are constrained by low GDP per capita, which at USD1,509 is less than half the ‘B’ median, low human development indicators and dependence on commodity exports.

Fitch’s proprietary SRM assigns Ghana a score equivalent to a rating of B on the Long-Term FC IDR scale. Fitch’s sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

The main factors that, individually or collectively, could trigger negative rating action are:
– Failure to narrow the budget deficit and reduce government debt/GDP.
– A decline in international reserves.
– An increase in macroeconomic instability.

The main factors that could lead to a positive rating action are:
– A reduction in the budget deficit and a marked decline in government debt/GDP.
– An improvement in Ghana’s external position, such as a narrowing of the current account deficit and the rebuilding of the external reserves position.
– A sustained improvement in macroeconomic stability.

Fitch assumes that Ghana’s oil production increases as new fields come on stream over 2017-2018. Fitch assumes Brent oil prices will average USD52.5 per barrel in 2017 and USD55 per barrel in 2018.