Ghana might record a possible downgrade by credit rating agencies during their periodic assessment of economies in Africa.
The recent publications by Standard & Poor rated Ghana B- with a stable outlook, Moody’s rated Ghana B3 with a stable outlook and Fitch’s credit rating for Ghana was a B with negative outlook.
Ghana’s poor economic performance in managing its debt stock, currency, and high budget deficit as well as falling foreign direct investment coupled with low commodity prices could be the debilitating factors.
As well known by the new President of Ghana, Nana Addo Danquah Akuffo-Addo, the implications of such actions can affect the country’s ability to attract foreign direct investment as it gives investors signals of macroeconomic challenges; it also defeats policy credibility, especially when credibility tags are against the previous administration’s failure to achieve economic and political leadership. Arguably, the most challenging stress about Ghana could be the morality to increase the debt stock levels above the 71% of GDP at a high price.
Certainly, the ability for Ghana to borrow in the international market may be curtailed. The downgrade will cause government to resort to domestic borrowing since it is unable to borrow in the international market. This will harm businesses, especially those in the construction and manufacturing sector, where government domestic borrowings reduce lending to the private sector thereby reducing investment and economic activity.
Moody rated Ghana B3 with a negative outlook on March 2015. In September 2016 it changed the outlook from negative to stable due to a reduction in the fiscal deficit and the implemented institutional reforms under the 3 year IMF program. Other reasons given for the stable outlook included reduction in government liquidity risk due to the issue of the US$750m Eurobond, improved balance of payments and an increased direct investment.
Recent statistics from the Bank of Ghana showed that Ghana’s total debt increased from GHc109.4 billion in August 2016 to GHc119.9 as at November 2016, representing 71.9% of GDP. This showed that between August 2016 and November 2016, Ghana’s debt stock had increased by GHc10.5 billion. In addition to the debt issues, the budget deficit for the fiscal year of 2016 is estimated to be about 7%, higher than the targeted 5% and the 6.3% recorded in 2015.
The rating agencies could lynch Ghana on these data and downgrade our ratings just because the high debt stock and the interest payment will make it difficult for government to raise funds which will increase the country’s liquidity risk.
Other reasons for Ghana’s possible downgrade are the fall in foreign direct investments (FDI) and the depreciation of the Ghana Cedi. FDI inflows to a large extent show investor confidence in the economy and also reflect an investors’ assessment of the country’s macroeconomic environment. FDIs decreased by 83.33 percent in the third quarter of 2016 according to the Ghana Investment Promotion Centre (GIPC). FDIs fell from 1.45 billion dollars in the second quarter of 2016 to 241.17 million in October 2016 (third quarter). International credit rating agencies are likely to review their ratings to reflect the opinion of the investors, which is captured in the FDI flows.
Aside the liquidity risk, Ghana also faces a high currency risk. The Cedi this year has according to the GCFM Cedi Index records a YTD depreciation of 0.89%, 1.93% and 0.43% against the US dollar, the Euro and the British pound respectively largely due to low commodity prices and low foreign exchange earnings. This presents grave challenges to Ghana’s economy and the country’s 2017 economic outlook. Presently, more than 60% of Ghana’s debt stock is foreign currency denominated. Besides, the continuous Cedi depreciation will cause the country’s international reserves to decrease in value which can lead to medium term currency crisis.
GN Research urges government to instantly carry out policies to restructure the economic system. Much attention must be paid to the fiscal deficit and the rate at which the country borrows. Steps must be taken now to restructure the country’s debts and renegotiate interest payments if possible. Also, the situation where state corporations borrow on central government’s budget must be reviewed. These corporations must be managed efficiently and be made to borrow on their own accounts to reduce the country’s obligations to creditors.
Evidently, the fiscal deficit of close to 7% recorded last year is inimical to the development of the nation since the nation already has a ballooned debt stock. Hence, government must control its expenditure and find sustainable ways of increasing revenue other than borrowing. Where there is the need to borrow, the government must ensure that the loans are long term and are put into profitable projects.
The central bank must also play its role effectively to reduce inflation and interest rates and stabilize the currency to improve the outlook for the economy.
Source: GN Research