News Guide Africa

Tag: Fitch Solutions

  • Ghana’s Debt Exchange to affect domestic, regional banks.. as Fitch warns of downgrades of more banks

    International rating agency, Fitch, is warning of more rating downgrades of African banks in 2023 as Ghana’s debt restructuring is expected to affect both domestic and regional banks.

     

    According to its 2023 Outlook report, sovereign debt distress is the major risk to African banks’ financial profile.

     

    “We are most concerned about potential sovereign defaults with many African governments facing very high and increasing debt servicing burdens exacerbated by rising interest rates, US dollar strength and unfavourable external funding conditions. The Ghana debt restructuring will affect domestic as well as regional banks”.

     

    It explained that African banks’ credit drivers will be undermined by both global and domestic shocks in 2023.

     

    “Operating environments will be affected by a combination of high inflation, rising rates, currency depreciation and hard currency shortages, but moderate Gross Domestic Product growth, with no major African economy entering a recession, combined with banks’ relatively good fundamentals and buffers, will prevent a significantly more negative scenario”, it noted.

     

    Fitch further said banks’ sovereign debt risks have increased, with some African governments struggling with debt-servicing burdens and unfavourable external funding conditions.

     

    It stressed that the banks could be downgraded due to further sovereign downgrades but the biggest risk comes from potential sovereign defaults that could affect banks in these countries as well as regional banking groups.

     

    “Asset quality risks will return to be more prominent in 2023. Nevertheless, we assume only a moderate increase in impaired loan ratios in most countries. A sharp fall in commodity prices as a result of the global slowdown or economic developments in China could cause a faster increase in loan quality weakening”

     

    Fitch continued that banks will however remain profitable, benefitting from rising interest rates and still-satisfactory loan growth (above GDP growth) which will mitigate a moderate rise in credit costs.

     

    It concluded that capitalisation, funding and liquidity remain sufficient, with the latter in particular, underpinning banks’ standalone creditworthiness, stating, “external funding will be scarce and expensive”.

  • Ghana-IMF negotiation to reach success in Q1 2023 – Fitch

    Ghana-IMF negotiation to reach success in Q1 2023 – Fitch

    Adnan Adams Mohammed

    As the government keeps assuring Ghanaians of reaching a deal with International Monetary Fund (IMF) before end of 2022, Fitch Solutions thinks otherwise.

    The global financial institution maintains that, Ghana will only reach a staff-level agreement with the IMF by the first quarter of 2023.

    This will mean that the country could secure a programme from the Fund by the end of quarter 1, 2023 or the second quarter of 2023. However, in its latest paper on “Division within Ghana’s Ruling Party to Weigh on Political Stability”, the international research firm also said should the Finance Minister, Ken Ofori-Atta, be replaced, negotiations with the IMF would likely remain largely unaffected.

    “While Ofori-Atta remained opposed to an IMF bailout – we believe that he would take a more accommodative approach towards negotiations with the Fund. As such, we believe that a change of finance minister would most likely not impact the timeline of IMF negations and we would retain our view that a staff-level agreement will be reached in Q123 [quarter 1, 2023]”, Fitch Solutions intimated in the paper.

    Consequently, as the government places all its hope on the IMF funds to ensure availability of foreign currency (U.S dollar) to help strengthen the local currency, the delay in reaching agreement will likely worsen the current worsened economic situation in the country.

    This has been confirmed by the paper as it stated that; “Worsening living standards amid rising consumer prices – inflation reached 40.4% year-on-year in October 2022, the highest reading since 2001 – and tighter monetary conditions have led to a 72.7% quarter-on-quarter increase in protests and riots across in quarter 3 2022. The country has also seen large industrial action in recent months, including a three-day retail strike in Accra in October [2022]”.

    Fitch Solutions also expects inflation to remain elevated in the months ahead.

    “Given that inflation is primarily driven by currency weakness, we expect price growth to remain elevated in the months ahead. Indeed, significant capital and financial account outflows caused by weakening investor sentiment will continue to weigh on the currency”.

    “Our view is further informed by the fact that previous periods of significant exchange rate weakness in Ghana all lasted roughly 12-14 months, suggesting that the cedi will continue to depreciate into quarter 1, 2023 (the current sell-off started in January 2022). This will keep inflation high, weighing on living standards and eroding support for the government”.

  • Cedi to loose 43% value to U.S. dollar in 2022 – Fitch Solutions

    Cedi to loose 43% value to U.S. dollar in 2022 – Fitch Solutions

    Adnan Adams Mohammed

    Fitch Solutions has projected that the local currency, the Cedi will depreciate in value of about 43 percent to the US dollar by end of this year.

    The investor firm is also projecting a 30.1% fall in value of the cedi to the dollar in 2023. This means, the woes of the cedi will not get better anytime soon.

    Disclosing this in its latest report on the country dubbed “Ghana’s Private Infrastructure Investment Set For Medium-Term Recovery”, it said, the continuing investor concern over the country’s large fiscal deficits puts downward pressure on the cedi.

    “We expect weakness for the Ghanaian cedi to persist throughout the near term, as we currently forecast the currency to depreciate by 43% and 30.1% against the US dollar in 2022 and 2023, respectively”.

    “We expect that Ghana’s inflation rate will remain high in the near term in the face of spiking global food and fuel prices and as continuing investor concern over the country’s large fiscal deficits puts downward pressure on the cedi”, it added.

    Again, it pointed out that the currency’s weakness will keep revenue risks elevated for foreign investors dependent on revenue streams in local currency.

    This is despite an expected $2 billion inflows from the Afrexim Bank and COCOBOD syndicated loan.

    Furthermore, it said in the light of the reliance of Ghana’s construction industry on imports, the cedi’s weakness will add to upward pressures on prices of construction materials from existing supply chain disruptions.

    This, in turn, will further contribute to increased project costs and potential investment delays in the near term.

    “In 2021, Ghana’s trade deficit for iron and steel products is estimated to have exceeded $1.2 billion, up from an estimated deficit of over $780 million worth of iron and steel products in 2020. In light of the Ghanaian construction industry’s reliance on materials imports, we expect that the cedi’s weakness will add to upward pressures on construction materials prices from existing supply chain disruptions. This, in turn, will further contribute to increased project costs and potential investment delays in the near term”.

    The cedi has since the beginning of the year lost about 36% in value to the dollar, according to Bloomberg.

    It depreciated by a little over 4% last week, starting the week at ¢10.10 pesewas to the American ‘greenback’.

    This has drastically shot up the prices of some goods and services, increasing both the cost of doing business and living in the country. 

  • Ghana’s US$3bn IMF bailout to be approved in Q4 – Fitch Solutions

    Ghana’s US$3bn IMF bailout to be approved in Q4 – Fitch Solutions

    Adnan Adams Mohammed

    Fitch Solutions has predicted that the International Monetary Fund (IMF) will approve the US$3 billion balance of payment (BoP) support package for Ghana in the 4th quarter of this year.

    The financial support which is expected to come in tranches, according to Fitch, at least US$1.0 billion dollars may be released to Ghana government by the end of the first quarter of 2023.

    Finance Minister, Ken Ofori-Atta, early last month revealed that, Ghana could get about US$3 billion from the IMF higher than the initial US$1.0 billion dollars the government wanted.

    “An IMF financial package of US$3.0 billion, which we expect to be approved in quarter 4, 2022, should alleviate pressure on Ghana’s external position in 2023”, Fitch Solutions foretold last week in its latest report on the country dubbed “Ghana’s Private Infrastructure Investment Set For Medium-Term Recovery”.

    “Ghana’s weak external position to strengthen on expected IMF deal, despite a widening balance of payments deficit caused by large financial account outflows, we believe that an expected IMF deal will help to support Ghana’s external position in 2023”.

    However, some analysts believe a Fund programme will not be approved until at least the end of quarter one, 2023.

    This is because the Fund is yet to conduct a Debt Sustainability Analysis (DSA) on Ghana’s debt.

    In the first quarter of 2022, capital and financial outflows increased by 188.7% year-on-year to $690 million, driven by net portfolio reversals and outflows of Foreign Direct Inflows.

    Combined with the country’s current account deficit, Fitch Solutions, said this has resulted in an overall balance of payments deficit of US$934 million in the first quarter of 2022, as against a deficit of $430 million in quarter one, 2021.

    “We expect net capital flows to remain in negative territory over second-half of 2022, given deteriorating investor sentiment towards Ghanaian assets, as reflected by the currency sell-off and rising bond yields. At the same time, Ghana is unable to tap international capital markets to finance the deficit, and this is putting downward pressure on its foreign exchange reserves, which have fallen to $7.7 billion in June, from $9.8 billion in January [2022].”

  • Govt to miss 2022 revenue target by GH¢11.5bn – Fitch Solutions

    Govt to miss 2022 revenue target by GH¢11.5bn – Fitch Solutions

    The country’s total revenue will end 2022 at ¢89.0 billion, far below the target of ¢100.5 billion, the July 2022 Africa Monitor Report by Fitch Solutions has revealed.

    This will keep the fiscal deficit high [8.5% of Gross Domestic Product, excluding bailout costs] as revenue was below 13.6% of its target in the first quarter of this year.

    Revenue growth, the report said, will remain above trend, but will miss the official target.

    “We at Fitch Solutions expect Ghana’s fiscal deficit to narrow to 8.5% of GDP in 2022, from 9.3% in 2021, facilitated by a widening tax base and higher oil receipts. We have revised our 2021 deficit from 11.3% previously on the back of full-year data published by the Ministry of Finance, which shows higher-than-expected revenues of ¢70.1bn, while total public expenditure rose to ¢109.3 billion”.

    However, public revenue will expand by 27.0%, above the 10-year pre-pandemic average of 23.4%.

    Fitch Solutions pointed out that the recent implementation of the Electronic Transaction Levy (e-levy) will further support revenue growth over the year. However, it will fall short of the 5 billion cedis revised projected targeted, for two reasons.

    This is based on two reasons.

    “First, the government had initially proposed a 1.75% tax on electronic financial transactions, but lowered it to 1.5% following pushback from the opposition. Second, authorities had planned for the tax to come into force on January 1 2022. However, the e-levy only took effect on May 1, five months after the start of Ghana’s fiscal year”.

    The report added that despite some fiscal consolidation efforts, public expenditure will remain elevated, preventing a more substantial narrowing of the deficit.

    In the 2022 budget, the government stated it will commit to ‘expenditure rationalisation and reforms’ in order to improve its fiscal position and maintain debt sustainability.

    However, Fitch Solutions projects that due to the rigid nature of Ghana’s expenditures, there will be limited room to significantly restructure spending over the short term.

    “We believe that due to the rigid nature of Ghana’s expenditures, there will be limited room to significantly restructure spending over the short term. Indeed, Ghana’s public wage bill and debt servicing costs accounted for 67.4% of total spending over quarter 1, 2022.”

  • High volatility of Cedi to discourage investment in Ghana’s infrastructure – Fitch

    High volatility of Cedi to discourage investment in Ghana’s infrastructure – Fitch

    Adnan Adams Mohammed

    Fitch Solutions forecasts Ghana’s construction industry to grow by 4.1% year-on-year in 2022, a slowdown compared to the estimated growth of 5.7% year-on-year in 2021.

    The rating agency notes that, despite the market’s strong fundamentals, including a track record of private investment in energy infrastructure, comparatively high political stability and security, and a relatively diverse competitive landscape, it expects that a substantial depreciation of the cedi against the US Dollar in 2022 will, in the near term, make private investors more reluctant to invest in Ghana’s infrastructure sector.

    Further indicating that, it do not expect that private investment will meaningfully cushion the negative impact of subdued public infrastructure spending on the market’s construction industry growth, the agency said.

    “We forecast that in 2022, the Ghana cedi will depreciate by 22.7% against the USD, significantly increasing revenue risks for the foreign investors that rely on expatriation of revenues”, Fitch Solutions, thus, said. “We forecast government capital expenditure to shrink to 3.3% year-on-year of GDP in 2022 and 2.9% year-on-year of GDP in 2023, down from 3.7% year-on-year in 2021”.

    “While this puts capital expenditure levels above those in 2018-2020 when Ghana’s construction industry growth averaged -0.1% per year, it remains below the comparatively high annual average levels of 4% of GDP between 2010 and 2017.”

    During the period between 2010 and 2017, the construction industry growth average of 8.1% per year.

    But the Governor of Bank of Ghana, Ernest Addison, said developments in the global capital markets, combined with internal challenges that resulted in the rating downgrade of Ghana’s economy, have played out to exacerbate price and exchange rate pressures in the domestic economy.

    The Ghana cedi, he noted, came “under severe pressure in the first quarter of 2022 as offshore investors exited positions in domestic securities at a time when domestic demand for forex had increased”.

    Speaking at the 6th CEO Summit in Accra, last week, Dr Addison said: “The FX pressures, coupled with tight forex liquidity due to absence from the international capital markets, contributed to the significant currency depreciation”.

    Cumulatively, he said the Ghana cedi depreciated by 15.8 per cent against the US dollar in the year to 18th May 2022, compared with an appreciation of 0.5 per cent in the same period of 2021.

    “To ease off increased volatility in the foreign exchange (FX) market, the Bank extended the forward auctions to include the Bulk Oil Distributing Companies”.

    “This formed part of the measures taken by the Bank to address the FX liquidity constraints within the local petroleum sector and aid price discovery, especially for the general pricing window within the downstream sector”, he noted.

    Also, Dr Addison said recent price developments indicate elevated pressures from both domestic and external sources.

    These include the global energy and food price shock, and its consequential upward adjustments on domestic ex-pump petroleum prices and transportation costs, domestic food prices, as well as the passthrough effects of the recent exchange rate depreciation.

  • Ghana ranks best investment hub in the Sub-region and Africa

    Ghana ranks best investment hub in the Sub-region and Africa

    Adnan Adams Mohammed

    Ghana has been ranked the best nation among it peers in Sub-Saharan region for trading and investment, Fitch Solutions Operational Risk Index has indicated.

    Ghana’s Trade and Investment Risk assessment scored of 50.9 out of 100 to outperform the West Africa average of 36.4. The score also was the second best on the continent while ranking 88th out of 201 markets globally.

    Despite the global challenges facing the economy, the report pointed out that Ghana’s markets have strong fundamentals, including a track record of private investment in energy infrastructure, comparatively high political stability and security, and a relatively diverse competitive landscape. It however expressed worry about the depreciation of the cedi which it said will in the near term make private investors more reluctant to invest in Ghana’s infrastructure sector.

    It therefore does not expect private investments to meaningfully cushion the negative impact of subdued public infrastructure spending on the market’s construction industry growth.

    “We expect that a substantial depreciation of the cedi against the US dollar in 2022 will in the near term make private investors more reluctant to invest in Ghana’s infrastructure sector”, Fitch Solutions, the research arm of rating agency Fitch, has noted in the report released last week. “We thus do not expect that private investment will meaningfully cushion the negative impact of subdued public infrastructure spending on the market’s construction industry growth.”

    The index reported also concluded that, Ghana scored 51 out of 100 in the Crime and Security Risk parameters to outperforms the West Africa average of 33.3 and also ranked first place in Africa.

    Below is the full report from Fitch:    

    Lower Public Investment To Slow Down Ghana Construction Industry Growth

    Key View

    •       We forecast Ghana’s construction industry to grow by 4.1% y-o-y in 2022, a slowdown compared to the estimated growth of 5.7% y-o-y in 2021. Ghana’s infrastructure construction industry is unlikely to benefit from higher oil and gold prices, as we expect that increased public revenues will be channelled towards debt servicing and Ghana’s high public wage bill rather than capital projects.

    •       We expect that a substantial depreciation of the cedi against the US dollar in 2022 will, in the near term, make private sector investors more reluctant to invest in Ghana’s infrastructure and construction sector and offset the adverse impact of subdued public infrastructure spending on the market’s construction industry growth.

    We forecast Ghana’s construction industry to grow by 4.1% y-o-y in 2022, a slowdown compared to the estimated growth of 5.7% y-o-y in 2021. Unlike in other markets, Ghana’s infrastructure construction industry is unlikely to benefit from higher oil and gold prices, as we expect that increased public revenues will be channelled towards debt servicing and Ghana’s high public wage bill rather than capital projects, as Ghana’s access to international capital markets will be constrained in the near term.

    Accordingly, we forecast government capital expenditure to shrink to 3.3% y-o-y of GDP in 2022 and 2.9% y-o-y of GDP in 2023, down from 3.7% y-o-y in 2021. While this puts capital expenditure levels above those in 2018-2020, when Ghana’s construction industry growth averaged -0.1% per year, it remains below the comparatively high annual average levels of 4% of GDP between 2010 and 2017, which enabled the construction industry growth rates averaging 8.1% per year.

    In 2023, we forecast Ghana’s construction industry growth to accelerate slightly as we forecast the depreciation of the Cedi against the USD to slow down to 4.6% y-o-y.

    Generally, this will reduce revenue risks for foreign investors, while lower inflation will improve demand for residential and non-residential construction.

    However, Ghana’s access to international capital markets will remain constrained and will continue to weigh on public infrastructure spending as well as the market’s construction industry growth.

    Muted Public Spending Limits Construction Growth

    Ghana – Government Capital Expenditure, % of GDP; Construction Industry Value, real growth, % y-o-y

    Despite the market’s strong fundamentals, including a track record of private investment in energy infrastructure, comparatively high political stability and security, and a relatively diverse competitive landscape, we expect that a substantial depreciation of the cedi against the USD in 2022 will, in the near term, make private investors more reluctant to invest in Ghana’s infrastructure sector.

    We, thus, do not expect that private investment will meaningfully cushion the negative impact of subdued public infrastructure spending on the market’s construction industry growth. We forecast that in 2022, the Ghana cedi will depreciate by 22.7% against the USD, significantly increasing revenue risks for the foreign investors that rely on expatriation of revenues.

    Economic Openness Boosts Operating Environment In Ghana

    Ghana & Regional Average – Trade & Investment Risk

    Note: Scores out of 100; higher score = more attractive market. Source: Fitch Solutions Trade and Investment Risk Index

    At the same time, Ghana ranks in first place out of the 16 West African markets included in our proprietary Fitch Solutions Operational Risk Index.

    With a Trade and Investment Risk score of 50.9 out of 100, Ghana outperforms the West Africa average of 36.4 and ranks in a competitive 2nd position regionally, and in 88th place out of 201 markets globally.

    Similarly, with a Crime and Security Risk score of 51 out of 100 Ghana outperforms the West Africa average of 33.3 and ranks in 1st place regionally and in 90th place out of 201 markets globally.