Africa´s star economy Ghana, loses some sparkle

A stable democracy, rule of law, rapid economic growth and almost all the other tick-boxes, plus new oil discoveries, have won Ghana a lot of fans lately.

So it´s worth paying attention to anything which goes against the sunny narrative (leaving aside its continued under-performance in the Africa Cup of Nations, which can now almost be taken as given). This comes in the form of two recent reports from rating agencies Fitch and Moody´s.

Both reports highlight concerns over Ghana´s budget deficit, which grew dramatically in 2012. Their message to newly-elected president John Mahama is one familiar to governments in the troubled eurozone: get cutting.

While Ghana´s B+ rating is not to be sniffed at, the country has been placed on negative watch by Fitch as a result of the deterioration in public finances.

Ghana´s presidential and parliamentary elections passed off smoothly in December, with opposition complaints taken to the courts rather than the streets and outside observers satisfied. But if the political process was judged sound, the same can´t be said for the economics of the elections.

Many governments indulge in pre-election spending sp rees but there are varying degrees of subtlety. Mahama´s National Democratic Congress was pretty conspicuous. Ghana´s July 2012 parliamentary budget set a target of 6.7 per cent of GDP for the government´s budget deficit. This was up on the 4.8 per cent target from the start of the year, but the government nonetheless managed to reach 12.1 per cent by end 2012, according to the central bank.

This, Fitch says in its report released on Monday, “shows a serious loss – not only of fiscal control – but of credibility” and raises “concerns about a major weakness in Ghana´s long-term creditworthiness”.

Moody´s, which released a credit analysis on Ghana on February 15 and rates it B1, warned: “On debt affordability metrics (interest and debt to revenues), Ghana ranks below all comparable peers”.
Fitch says it is current rather than capital expenditure whic h lies behind the rising deficit. Current spending rose by 2.9bn cedis ($1.5bn) while capital spending fell by 1.3bn cedis. The public wage bill has more than doubled in just two years, they say. Fuel subsidies have been heading up too.
The National Petroleum Authority has said they could increase to 2.4bn cedis this year, up from around 1bn cedis in 2012.

Oil, the cause of much of the excitement around Ghana´s economic prospects, currently only contributes 1 per cent of GDP to state revenues, Moody´s says. And then of course there are higher interest payments to cover all the new borrowing.

At 47 per cent as of end 2012, debt to GDP is low by the standards of many developed economies, and low in the context of Ghana´s recent history – in 2000 it reached nearly 120 per cent and the country was subsequently a recipient of relief under the Heavily Indebted Poor Cou ntries Initiative.
However, the figure has recently been rising again, up from 31 per cent in 2008 and as Fitch says it has been taken at “punitive rates”. Rates on short-dated treasury bills are 22.7 per cent, and the government´s financing costs rose from 1.9bn cedis in 2011 to 6.8bn cedis in 2012.

The government has hinted at plans to return to international capital markets with a eurobond issue this year – the first since its 2007 debut. In which case, it will likely be looking to tidy up its appearance.

Both Moody´s and Fitch think Ghana will achieve strong growth as oil and gas come online and taxes start flowing in, meaning the government should be able to plug its deficit without too much difficulty. This can´t be taken for granted though, as Moody´s points out:
Ghana remains highly susceptible to external financial shocks in the form of (1) s ustained currency depreciation; (2) volatility in commodity prices (oil/gold/cocoa); and (3) a sudden stop in portfolio inflows into the domestic capital market for government securities, since foreigners hold a significant share of local-currency government debt with maturities of over three years.

This vulnerability is exacerbated by low levels of foreign-currency reserves (which currently amount to less than three months of imports) and a large share of foreign-currency-denominated public-sector debt (21% of GDP, or 45% of total debt in 2012).

The government is already moving on the fuel subsidy, with prices for premium petrol and diesel hiked 20 per cent on Sunday, and a new budget is due to be released in March. However, in a rebuke of a kind that European governments have been getting rather fed up of lately, Fitch concludes that in light of the past year´s events: “Fi scal credibility has suffered another blow, with budget announcements likely to be met with increased scepticism.”

Not enough to rob Ghana of star status, but it takes off some of the sparkle.

Source: Financial Times