Fitch downgrades Ghana to B on fiscal loosening, external vulnerability

By bne IntelliNews October 18, 2013

Fitch Ratings has downgraded Ghana's long-term foreign and local currency issuer default ratings (IDRs) and its senior unsecured ratings to B from B+, citing the government's failure to fully implement its fiscal consolidation plan in 2013, increased external vulnerability and weakened policy credibility. Ghana’s budget deficit surged to 11.8% of GDP in 2012 from 4% in 2011, while its public debt grew to 48.8% of GDP last year from 38.3% of GDP in 2011. The global ratings agency expects that the government will fail to meet its 9% of GDP deficit target for this year, as it continues to overrun on wages, interest costs and arrears. It mentioned, however, that the government’s decision to raise sharply utility tariffs and scrap fuel subsidies reduces the risk of an overrun in the coming years.

Fitch forecast Ghana’s current account deficit to widen to 13.1% of GDP in 2013, from 12% in 2012, reflecting lower gold prices and still strong import demand. The West African country is a major producer of gold, oil and coca. Fitch does not expect capital inflows to keep pace with the widening current account deficit, keeping foreign reserves under pressure. Import cover is forecast to remain at 2.9 months, leaving Ghana exposed to exogenous shocks.

Fitch noted also that the larger-than-expected budget deficits have weakened Ghana’s policy credibility, putting pressure on the exchange rate through the large current account deficit. It added that the central bank’s monetary policy has not been successful in curbing inflation, which reached a 3.5-year high of 11.9% in September, remaining above the central bank's target band of 2pps either side of 9% for a fourth month in a row. Moreover, high domestic bond yields of around 20% undermine the sustainability of government finances. Domestic debt represents 48% of total government debt, while the potential withdrawal of foreign participants, which hold 26% of domestic debt (56% of foreign reserves), increases Ghana's vulnerability.

Fitch noted also that Ghana’s ratings are supported by a robust economic growth of over 7% in the last decade, by its strong governance track record and democratic history and by a favourable business environment, reflecting its ability to attract foreign direct investments, which stand at 7% of GDP.

Fitch’s outlook on Ghana’s ratings is stable. The agency has also lowered Ghana’s country ceiling to B from B+ and affirmed its short-term foreign currency IDR at B.

On July 25 Ghana sold a USD 750mn 10-year Eurobond, its second, amid strong demand with bids worth USD 2.2bn. The coupon was set at 7.785%, but the issue was priced to yield 8%. It has said it may issue another Eurobond this year, as it wants to raise between USD 200mn and 250mn to fund project developments in the power sector. The country is rated B1 by Moody’s and B by S&P.

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