Adnan Adams Mohammed
A senior economist has backed the recent position of Fitch, one of the international rating agency that, over drawing on the country’s international reserves in an attempt to stabilise the cedi will lead the economy into emergency theatre room.
The professor of economics worried that, Ghana may have to go to the International Monetary Fund (IMF), against government’s will, eventually when the economy deteriorates further as a result of the escalating Cedi depreciation.
Fitch Ratings in a podcast said Ghana’s international reserves position has become very reliant on Eurobond issuance. Indicating that, Ghana is not in a situation where the government needs to constantly roll over hard currency debt or whose debt market is wholly reliant on non-resident investors. In supporting the Fitch’s position, the University of Ghana economist noted that, a careful look at the template that Ghana sent to the IMF in 1965 under the watch of Dr Kwame Nkrumah, which is a reflection of what has been happening over the years, there’s only one thing left which is keeping us from going to the IMF right now and that has to do with the depreciation of the cedi.
“If the Bank of Ghana decides to fight that, burn through our international reserves and once the international reserves deplete to a certain level, you have no choice than to go the IMF in an ambulance”, the economist, Prof Godfred Bokpin has said during a TV discussion, last week. “The effect of that is beginning to show on the cedi and what will happen now is that everybody is waiting to see to what extent can the Bank of Ghana defend the cedi with their international reserves.”
“This was what we did in 2014 and somewhere in the middle of 2014, our net international reserves could only cover like 2 months of imports. When it gets to that point, you will have to make a call to the IMF,” he added.
In its Fixed Interest Podcast Series in which Mr Toby Iles, Head of Middle East and Africa Sovereign Ratings featured Mr Jermaine Leonard, the Director at Fitch Sovereign and Lead Analyst for Ghana and Zambia, the agency said Ghana’s inability to access the international market played a major role in the country’s current downgrades.
Talking about the drivers of the downgrade of Ghana’s ratings and the negative outlook, Mr Leonard said: “The key rating driver for the downgrade to B- and the negative outlook is the sovereign’s loss of access to international bond markets”.
“We believe that not being able to issue Eurobond debt elevates some concerns regarding Ghana’s external liquidity, especially as we expect global financing conditions to remain tight for some time and it also exacerbates the existing weaknesses of Ghana’s public finances”.
According to him, “Ghana is not in a situation where the government needs to constantly roll over hard currency debt or whose debt market is wholly reliant on non-resident investors”.
In fact, Mr Leonard added, “Ghana ended 2022 with an international reserves position that we estimate at $7.9 billion and that is just above three months of current external payments and that is an improvement for Ghana”.
“Ghana’s reserves averaged about two-and-a-half months of coverage over the previous ten years, so, that improved reserves position will allow Ghana to meet its external debt servicing payments in 2022”.
“That said, Ghana’s international reserves position has become quite reliant on Eurobond issuance for replacement”, he pointed out.
Continuing, he noted: “If you were to look at a historical chart of monthly reserves levels, you would notice the peaks and valleys that correspond to regular Eurobond issuance followed by the gradual drawdown on reserves until the next bond issuance”.
“Also, non-residents do hold about 20 per cent of Ghana’s domestic government debt and that comes to just under US$6 billion. This is all medium- and long-term issuance, which limits the risk of capital flight but our concern is the slow and steady draining of reserves but then there is also a risk of foreign investors selling what they hold and taking their dollars out of Ghana, which would put further pressure on reserves”.
The other concern, Mr Leonard mentioned, “is specifically about the public finances”, explaining: “Ghana has a medium-term debt sustainability issue that will necessitate a strong fiscal consolidation to get debt levels on a downward path but beyond just the level of debt, there are debt affordability issues; Ghana’s debt is more than five times its annual government revenue and yearly interest costs take up a little less than half of government revenue, so, few external financing options will mean an increased reliance on more expensive domestic debt and that will keep the interest burden high, making consolidation more difficult”.
Asked about the prospects for new sources of external financing and the medium-term fiscal consolidation, Mr Leonard said: “Along with the drawing down of international reserves and the use of IMF SDRs, we do expect that the government will be able to find some additional external financing; this could come from private loans from international commercial banks, or, perhaps, an additional lending from official lenders – an IMF programme is a possibility. This would, also, likely open international capital markets to Ghana again. Ghana completed an IMF programme in 2019 but has been reluctant to return to a programme. That said, Fitch believes that it would be the most likely outcome if the government were to experience some real financing stress”.
Importantly, he added, “I would note that we do not expect that this would be like Zambia, where IMF negotiations dragged on over the course of close to two years and only brought to fruition by a default event and a change in government”.
“Regarding fiscal consolidation, we do expect to see a narrowing in the fiscal deficit but the problem of low government revenue and rigid fiscal structure will remain. Ghana’s 2020 budget forecast a reduction of the deficit to 7 per cent in 2022 and to 5.3 per cent of GDP by 2023. We believe that it is optimistic, our forecasts are for a narrowing in the fiscal deficit to around 8 per cent of GDP by 2023”.
“Now, this should be a significant consolidation, as the overall fiscal deficit was 15 per cent of GDP in 2020”.
Further, he said “we think that a good deal of the deficit reduction will come from COVID-related spending falling out of the budget and that the government will continue to face low domestic revenue mobilisation and that will present some challenges, as interest costs remain high and as the government continues to realise contingent liabilities from the energy sector”. In conclusion, he noted, “we do expect some fiscal consolidation but at a lower pace than what’s in the government’s medium-term fiscal framework and there are some notable risks that could materialise over that period”.
On what could influence a stable rating and positive outlook for the country, Mr Leonard said: “On the positive side, that is what things could lead to a stabilisation of the rating? A resumption of access to international capital markets would be a big one and that could come from an IMF programme, or from a change in investor sentiments. Over the medium term, we will be paying attention to the international reserves position and whether Ghana can see a rise in non-debt creating flows like FDIs and we’ll also be paying attention to whether the government can implement its fiscal consolidation plan and put public sector debt on a downward path”.
“In terms of negative rating sensitivities, here again, the reserves levels will be important as a measure of external liquidity and we’ll also be watching the government’s ability to source new external financing with which to meet its debt servicing obligations. Also, we will be paying attention to the level of fiscal consolidation that the government can achieve along with any signs of stress in the domestic debt market”.
Fitch downgraded Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B- ‘from ‘B’ with a negative outlook in January 2022. The downgrade of Ghana’s IDRs and negative outlook, the rating agency said, reflected the sovereign’s loss of access to international capital markets in the second half of 2021, following a pandemic-related surge in government debt.
Fitch, in a report, said, “This comes in the context of uncertainty about the government’s ability to stabilise debt and against a backdrop of tightening global financing conditions. In our view, Ghana’s ability to deliver on planned fiscal consolidation efforts could be hindered by the heavier reliance on domestic debt issuance with higher interest costs, in the context of an already exceptionally high interest expenditure to revenue ratio.”