Ghana’s downgrade to ‘B-‘ was predictable – Prof Gatsi
Professor John Gatsi, the Dean of the University of Cape Coast (UCC) Business School has explained that the recent economic ranking of Ghana by Fitch that downgraded the country to ‘B-‘ from ‘B was not surprising.
He observed that the signals were already visible that the downgrade was possible.
Prof. Gatsi in an interview with TV3 on Monday, January 17, 2022, stated that “I think we are not surprised about the downgrade because the fiscal indicators are very clear. We do know that for some time now our interest payments, as a ratio of tax revenue, have been going up significantly. In 2021, the interest payment of about 32.5 billion cedis as a ratio of what has been put up by GRA of about 57.3 billion.
“That gives you around 47 per cent and you add that of compensation and expenditure on infrastructure, you are going around 127 per cent of the revenue and so all these indicators are very clear to us.
“You will recall that second half of last year the signals were there but we have not been able to do anything that will actually give that confidence.”
Meanwhile, the international credit rating firm Fitch has stated that “the downgrade of Ghana’s Incentive distribution rights-IDRs and Negative Outlook reflect the autonomous’s loss of access to transnational capital requests in 2021, following an epidemic- related swell in government debt. This comes in the environment of query about the government’s capability to stabilise debt and against a background of tensing global backing conditions. In our view, Ghana’s capability to deliver on planned financial connection sweats could be hindered by the heavier reliance on domestic debt allocation with advanced interest costs, in the environment of a formerly exceptionally high-interest expenditure to profit rate”.
“Ghana’s effective loss of request access to transnational bond requests increases pitfalls to its capability to meet medium-term backing needs. In our view, Ghana has sufficient liquidity and other available external backing options to cover near-term debt servicing without Eurobond allocation. Still, there’s a threat that non-resident investors in the original bond request could vend their effects, particularly if confidence in the government’s financial connection strategy further weakens, placing downcast pressure on its reserves.”
Fitch projected that Ghana will be unfit to issue transnational capital requests in 2022 and prospects for doing so in 2023 are uncertain. Ghana’s transnational reserve position has come largely reliant on periodic Eurobond allocation. Also, as of July 2021, non-resident investors held just below 20 (USD5.8 billion) of Ghana’s outstanding domestic government debt. While the maturity of these effects is long-term, an exodus would put fresh downcast pressure on Ghana’s reserves
“We forecast that Ghana will face approximately USD2.7 billion (3.3% of GDP) in sovereign external interest service and amortisation payments in 2022. We believe that the government can meet its external debt servicing without market access given its reserves, which we estimate at USD7.9 billion at end-2021 (3.2 months of current external payments). Reserves were bolstered by USD3 billion in Eurobonds in 2Q21, which helped the government to meet its approximately USD3.5 billion (4.7% of GDP) in sovereign external debt servicing costs last year, and by the USD1 billion IMF SDR allocations”.
Fitch forecasts the general government financial cash deficiency to constrict to9.1 of GDP in 2022 from15.1 in 2020 and12.5 in 2021 ( including 3 of GDP in domestic arrears concurrence and payments related to the state-possessed energy sector). The 2022 deficiency would still be further than twice the 2022‘B’ standard of4.6 and the threat to public finances remain high. The government envisages a deficiency of ( including fiscal and energy sector support) of7.4 in 2022 and 5.5 in 2023, with a fall to below the legal deficiency ceiling of 5 in 2024.
Although the government’s financial connection plans are concentrated on profit measures espoused in the 2022 budget, including a new1.75% e-levy on certain digital deals and changes to the computation of certain levies and import duties. The medium-term financial frame envisages that these new profit measures, together with fading epidemic-related expenditure, will drive an increase in government profit to20.0 of GDP in 2022 from an estimated 15.4% in 2021.
However, Fitch believes that “Ghana will achieve moderate medium-term financial connection, but that the government’s vaticinations are exorbitantly auspicious. We read the financial deficiency will constrict by significantly lower, to9.5 of GDP in 2022 and roughly8.0 in 2023, as government profit gests a lower increase. Ghana has plodded with earlier sweats to raise profit/ GDP and public finances were deteriorating indeed before the epidemic, albeit incompletely related to the clean-up in the fiscal and energy sector”.
General government debt reached an estimated 83 of GDP at end-2021, including roughly 2 of GDP in debt held through the Energy Sector Levy Act special purpose vehicle. We read government debt to remain on an upward path through 2025, but anticipate debt to grow at a slower pace as the primary insufficiency narrows in 2022 and 2023. Debt affordability criteria will remain weak. Ghana’s debt constitutes 539 of government profit, compared with the‘B’ standard of 325. Interest payments were44.6 of profit in 2020 and the rate is likely to continue rising through 2023, assuming a rising share of domestic debt in total debt in the absence of external backing options.
Fitch estimates that Ghana’s GDP growth accelerated to 4.7% in 2021 from 0.4% in 2020. We forecast growth to increase further to 5.5% in 2022, as the industrial sectors, including oil, recover in line with global growth recovery. Ghana experienced three years of strong growth prior to 2020, largely driven by increasing oil production. We expect oil production to increase to 190 thousand barrels per day (kbpd) in 2022, from an estimated 160 kbpd in 2021, but to remain flat through 2023, which will limit Ghana’s medium-term growth potential.
“We expect post-pandemic growth recovery to keep GDP growth potential around 5%. The number of Covid-19 cases has increased dramatically in January, due to the Omicron wave, but hospitalisations and deaths remain below previous waves. Omicron is not likely to significantly impact 2022 growth. However, only 20% of Ghanaians have at least one vaccine dose. The low level of vaccination means that Covid-19 will continue to present risks to Ghana’s medium-term growth.
“We forecast average annual inflation to decelerate slightly to 9.0% in 2022 after averaging 9.8% in 2021. Global supply chain issues fed through to domestic inflation, as did higher energy prices. The Bank of Ghana raised its main policy rate by 100bp to 14.5% in November 2021, reversing the 100bp cut that came in May. We envisage additional rate hikes in 2022, which could further exacerbate the government’s domestic debt interest costs”.
Meanwhile, experts noted that “Ghana’s external position will continue to be supported by a structural shift in the current account balance. We estimate that the current account deficit widened to 3.4% of GDP in 2021, from 3.2% in 2020, as imports recovered and exports remained flat on a nominal basis. An increase in gold and oil exports will help the current account deficit to narrow to 3.1% in 2022. Ghana’s current account deficit averaged 7% of GDP in the 10 years prior to 2017, when oil production reached significant levels.
Fitch also expects that the overall external balance will improve as FDI increases in 2022 and 2023. “Higher FDI flows and lower fiscal financing needs will help reduce Ghana’s overall external indebtedness”. Fitch forecasts net external debt to fall to 25% of GDP in 2022 and further in 2021. The cedi remained broadly stable throughout 2020 and 2021.
Source: Richard Mensah Adonu | Join our Telegram Group
