Unimpressed by Ghana’s efforts, S&P downgrades rating

Unimpressed by Ghana’s efforts, S&P downgrades rating

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Ghana's finance minister Seth Terkper
terkper
Finance minister Seth Terkper: surprised at S&P’s decision

Seemingly unconvinced by the government’s efforts to dig itself out of a fiscal hole, ratings agency Standard & Poor’s (S&P) downgraded Ghana’s sovereign rating by one notch on October 24, citing concerns about the cost of financing the country’s high fiscal deficit and doubts about whether the government can reduce it quickly enough.
The decision to lower the rating to “B-” with a stable outlook from “B” with a negative outlook appears to contradict government comments about the impact of a possible deal with the International Monetary Fund to stabilise the economy.
Finance minister Seth Terkper told Reuters the decision was a surprise and does not reflect government progress in stabilising the macro economy or prospects for the IMF deal.
Ghana’s economy has grown rapidly in recent years through exports of gold, cocoa and oil but the 2014 forecast is weighed down by fiscal problems such as rising inflation, a currency that has fallen sharply and a budget deficit above 10 percent.
News in August of the IMF talks helped stabilise the currency which has rebounded slightly after losses of around 40 percent this year. The government also secured an attractive rate for its $1 billion Eurobond and sealed a record cocoa loan.
These factors, combined with a deal with the Fund that the government hopes to strike in November, enabled government officials to reassure markets and voters about the economy. S&P, however, expressed doubts.
‘There has been a recent slight respite due to the issuance of the Eurobond, but fundamentally there is not a clear path out of this high fiscal deficit situation,’ S&P director Ravi Bhati said.
The ratings agency has concerns over the possible IMF deal given that the Fund is likely to want a faster pace of fiscal consolidation than the government is able to deliver, Bhati said.
Terkper said the government was reaching convergence with the IMF on a deal but had anyway pursued its own fiscal reforms. It had struck a good bargain with labour unions, cleared one time wage arrear costs and refinanced bonds.
Government revenue was hurt by a fall in gold and cocoa prices and a shortfall in gas supplies, he said. But revenue would increase as domestic oil production picked up steam and gas started pumping from the offshore Jubilee field, so medium term prospects are strong, he told Reuters. ‘We are positive of regaining our ratings because the country will grow back to a positive growth path,’ Terkper said.
Ghana saw years of GDP growth above 8 percent but the statistical service projected GDP for 2014 at 6.9 percent. S&P put annual GDP growth in the 2014-2017 period at 6 percent, but even that figure is still above the Fund’s projection of 5.1 percent GDP for economies in sub-Saharan Africa this year.
The S&P downgrade follows similar moves by Moody’s and Fitch in the last year. It divided opinion among analysts.
The apparent recent upturn in economic fortunes is undercut by the government’s unwillingness to reduce expenditure and the deficit and this explains the S&P decision, Joe Jackson, director of business operations at Dalex Finance in Accra told Reuters.
Sampson Akligoh, managing director of InvestCorp investment bank, said the downgrade ‘is more speculative than otherwise’ given that markets were waiting to assess government commitment to consolidation and how far an IMF deal could restore credibility.
In late September Fitch reaffirmed its sovereign rating for the country at ‘B’, five marks below investment grade and gave it a negative outlook. Fitch said its affirmation reflected a number of factors, including the government’s successful $1bn Eurobond and the Ghana Cocoa Board (Cocobod) successfully raising $1.7bn syndicated loan. These, Fitch said, have alleviated some short-term pressures on reserves and the currency.
The agency strongly believes that only by agreeing and implementing a strategy with the IMF can the government achieve a lasting reduction in funding pressures. ‘A lasting reduction in funding pressures, for both the fiscal and current account deficits, is unlikely until an IMF programme is agreed and a credible deficit reduction strategy is implemented,’ it said.
According to Fitch, the magnitude of fiscal consolidation in the coming years will depend on the path of deficit reduction agreed with the IMF. ‘Two years of double-digit deficits, combined with a cumulative 45 per cent depreciation of the currency since January 2013, has seen debt jump to 61.7 per cent of GDP in 2013, based on Fitch’s calculations, from 39 per cent in 2011 – well above the ‘B’ median of 43.7 per cent. The Bank of Ghana’s role in funding Ghana’s budget deficit in the first half of the year [2014] illustrates the financing challenges the government faces,’ it said.
Other analysts are nevertheless bullish about the near-term outlook for the economy. They believe that Ghana can sustain economic growth well into the future if the government improves its macreconomic management which requires bold efforts to reduce its budget imbalance. ‘The near-term outlook for Ghana is positive, with growth projected at 8 per cent in 2014,’ the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana, said in a study of the Ghana economy early October.
Despite this optimism ISSER notes a declining trend in GDP growth since 2011, pointing out that the 2013 growth rate of 5.4 per cent was short of the targeted 8.8 per cent. ‘This negative out-turn is the largest since 2008. For instance, in 2012, the shortfall was 0.6 per cent, compared to the 3.4 per cent in 2013,’ said ISSER director Felix Asante. The 2013 growth was buoyed particularly by oil exports, with the non-oil GDP growth rate of 3.9 per cent, compared with 5.4 per cent overall GDP growth.
ISSER identifies unemployment as a key challenge, saying opportunities for employment in the industrial sector remain limited and highly specialised. In addition, the composition of Ghana’s trade continues to be dominated by primary exports – gold and cocoa. ‘The reliance on a narrow range of commodities as well as a narrow range of markets makes Ghana’s export earnings extremely vulnerable to volatility in these markets,’ ISSER said adding that ‘there is an urgent need to diversify exports in terms of products as well as markets.’
Also, to ensure that medium-term growth targets are met, ‘there is the need for massive investment in the agricultural sector – whose output is declining – as a whole and in infrastructure in particular.’ Felix Asante attributed the agriculture sector’s declining performance to the rapid expansion in the oil sector, which shrank the agricultural sector’s performance in relative terms. According to ISSER, the advent of oil production seems to be changing the pattern of the country’s exports, wondering whether the country is teetering toward an oil-dominated economy, and if the proceeds from oil exports would be used to diversify the economy.
In addition, Ghana’s weak infrastructural systems, especially in the energy and transportation sectors, and ineffective public administration structures undermine efforts to make investing in Ghana a worthwhile venture. In order to ensure industrial growth, the challenge of power shortages needs to be tackled with robust efficiency by the government.
On the fiscal side, there is the urgent need for prudent management of government resources. ISSER is urging the government to increase efforts to mobilise revenue through an expanded tax base, saying the main culprit for recent huge deficits is government expenditure, which should be reined in, in the short-term. ‘Indeed the budget’s credibility, particularly with respect to the overall fiscal targets, will improve if there are more concrete steps to reduce expenditure,’ it says adding, ‘ the rigidities in government expenditures can only be matched by increasing the limited fiscal space the country has.’
It warns that unless revenues are able to match potential expenditure slippages that might occur, the overall fiscal target may be missed. ‘There is no doubt that the IMF programme will help in the stabilisation effort for 2014, but it is unrealistic to expect it to change the potential fiscal slippage that is likely to occur in 2014.’

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