Pre-election spending could weaken Ghana’s credit outlook – Fitch Ratings

With the sudden death of Ghana’s President, Prof. John Atta Mills July 24, 2012, just months to the December elections, ratings agency Fitch on July 27, 2012 indicated that it has highlighted the country’s political and economic challenges.

Fitch’s main concern remains that a tight political contest will result in further fiscal slippage, as the government seeks to maintain power.

President John Mahama was sworn-in after the demise of Prof Mills and has been nominated to run as the flagbearer of the ruling National Democratic Congress (NDC) for the 2012 elections but will face fierce competition from the opposition New Patriotic Party (NPP), which was only narrowly beaten by a 1% margin at the 2008 polls.

According to Fitch, it has previously indicated that getting through the election without fiscal slippage could warrant a positive action on Ghana’s ‘B+’ rating, as the medium-term outlook has been greatly enhanced by oil and gas sector development.

The government recently presented a supplementary budget to parliament, a move the ratings agency says showed that the government is “struggling” to keep spending in check ahead of the elections. The budget requested an additional GH¢2.6 billion of public spending (3.7% of GDP) that would see the country’s fiscal deficit rise from an initial target of 4.8% of GDP to 6.7% of GDP.

“However, further slippage, potentially driven by high wage increases or to a lesser extent the recurrence of large utility subsidies should oil prices surge, will erode the modest gains Ghana has made over the past year to consolidate the fiscal position,” Fitch said in a statement.

A weak fiscal position and a lack of fiscal discipline will weigh on the rating unless President Mahama takes a firm stance against further fiscal laxity ahead of the elections, it added.

It urged the Mahama-led government to focus urgently on reform, especially in public expenditure management.

Structural sources of fiscal slippage will need to be addressed, including fuel and utility subsidies, weak controls on capital spending, and civil service reforms, the agency suggested.

If all are done, Fitch argues “This would ease concerns about a major weakness for Ghana’s creditworthiness and combined with the boost from oil production and revenue, could allow Ghana’s rating to improve.”

Ghana’s outlook on the rating is Stable, Fitch noted.

By Ekow Quandzie