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Tag: Fitch's ratings

  • Fiscal deficit to end year at 8.1% of GDP

    Fiscal deficit to end year at 8.1% of GDP

    By Elorm Desewu

    Fitch, one of the international ratings agencies, says the country would record a higher end of year fiscal deficit of 8.1% of Gross Domestic Product (GDP) which includes the energy-sector clean-up costs not contained in the government’s figure.

    The delays in implementing the new revenue measures have resulted in lower revenue and a larger nominal deficit in first half of 2022 relative to budget forecasts. However, the 2022 mid-year fiscal policy review presented in July contains an updated fiscal deficit forecast of 6.6% of GDP compared with the original deficit forecast of 7.4%, owing to an upward revision in nominal GDP.

    According to Fitch, the possibility of new revenue measures could lead to a further shrinkage of deficit in 2023, but the government’s slim majority in parliament could frustrate attempts to raise tax rates or implement new taxes.

     Government interest costs have reached 47.5% of revenue in 2021, considerably above the current ‘B’ median of 10.7%. We expect interest costs to remain at or above 45% through 2024.

    Interest costs largely reflect high yields on domestic debt. Yields have climbed higher in 2022, following inflation spikes and monetary tightening by the Bank of Ghana (BOG). Yields on the 91-day treasury bill reached 26% in July 2022, up from 12.6% in July 2021. Moreover, the government has reported under-subscribed yields, necessitating the tapping of existing medium-term issuance. The government has increased its outstanding advances with the BOG, providing some additional domestic financing and could conduct another private debt placement with the central bank as it did in 2020, but such a measure would necessitate parliamentary approval.

    Global shocks have depressed Ghana’s near-term growth outlook. Fitch forecasts real GDP growth to slow to 4% in 2022, following a post-Covid growth recovery of 5.4% in 2021, driven by strong recovery in the agriculture and service sectors. The industrial sectors, including the oil sector, experienced a contraction in 2020, adding that oil production is expected to remain level, at approximately 170 thousand barrels per day in 2022.

    “We forecast growth to rebound to 5.3% in 2023 and for medium-term growth to average between 5% and 6%, but continued stagnation in the oil sector, failure to implement fiscal consolidation, and /or additional global shocks are risks to the growth outlook” the report said.

    Fitch expects inflation to peak in 3Q22 before slowing through the end of the year. We forecast annual average inflation of 22% in 2022, slowing to 16% in 2023. The BOG’s Monetary Policy Committee (MPC) has raised the main policy rate twice in 2022, by a total of 450bp to 19%. Fitch believes that the central bank would raise the policy rate again if inflation does not peak in line with current expectations. A higher policy rate would likely be transmitted to domestic yields, putting further pressure on the government’s domestic borrowing costs.

    Fitch Ratings downgraded Ghana’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to ‘CCC’ from ‘B-‘. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

    The downgrade reflects deterioration of Ghana’s public finances, which has contributed to a prolonged lack of access to Eurobond markets, in turn leading to a significant decline in external liquidity. In the absence of new external financing sources, international reserves will fall close to two months of current external payments (debits in the current account) by end-2022.

    The government has requested support from the IMF, which is likely to lead to additional financing from the IMF and other multilateral lenders. However, the government’s high interest costs and structurally low revenue as a percentage of GDP have increased the likelihood that IMF support would necessitate some form of debt treatment. The high interest burden on local-currency debt also means that the inclusion of a domestic debt treatment cannot be ruled out.

    In July 2022, the government reversed a long-standing position against seeking IMF support. Fitch believes that a deal with the IMF is likely within the next six months. It estimates that a programme could disburse as much as USD3 billion and unlock budget support from other multilateral lenders. However, the timing of such a deal is uncertain and would be dependent on the government’s ability to present a credible fiscal reform plan in line with increasing government revenue and improving debt affordability metrics. The most recent IMF debt sustainability analysis, conducted in 2021, found Ghana at a high risk of debt distress and vulnerable to shocks from market access and high debt servicing costs.

     Fitch estimates that Ghana faces USD2.75 billion of external debt servicing in 2022, including amortisation and interest, and USD2.8 billion in 2023. Access to external financing will remain tight, as Ghana is likely to remain locked out of Eurobond markets, which had come to be a regular source of external financing for the government.

    In 2022, Fitch expects that the government will meet its external debt obligations, in part, through a combination of a USD750 million term loan from the African Export-Import Bank (BBB), USD250 million in syndicated loans from international commercial banks, and up to USD200 million from the government’s sinking fund.

    The 2022 mid-year policy review indicates that the government expects to source the rest from the IMF and other multilateral lenders. In the absence of an approved programme by the end of the year, the government would have to draw more heavily on its international reserves, which were USD7.6 billion, including oil funds and encumbered assets, as of June 2022.

    The government’s high interest costs and low revenue will continue to be impediments to fiscal consolidation efforts. The 2022 Budget’s medium-term fiscal framework had envisaged narrowing the deficit to below the existing deficit ceiling of 5% of GDP by 2024. The expected consolidation was based on the expiry of pandemic-related expenditure items and a significant increase in domestic revenue, driven by new taxes, including a levy on electronic transactions.

  • Inflation to Peak in Q3, end year at 22% – Fitch

    Inflation to Peak in Q3, end year at 22% – Fitch

    Adnan Adams Mohammed

    Fitch, in it’s latest rating action, expects inflation to peak in 3Q22 before slowing through the end of the year.

    The ratings released last week, projected annual average inflation of 22% in 2022, slowing to 16% in 2023. Fitch’s projection is better than Ghana government’s revised projected end year inflation of 28.5% as presented by the Finance Minister, Ken Ofori-Atta, during the presentation of the mid-year review budget to parliament, fortnight ago.

    Fitch’s projection is grounded on the recent Bank Of Ghana’s Monetary Policy Committee (MPC) decision to raise the main policy rate twice in 2022, by 450bp to 19%. However, Fitch believes that the central bank would raise the policy rate again if inflation does not peak in line with current expectations.

    “A higher policy rate would likely be transmitted to domestic yields, putting further pressure on the government’s domestic borrowing costs”, Fitch Ratings indicated.

    The government revised the end-period inflation from 8% to 28.5%.  

    Mr Ofori-Atta explained that, the revision of the end-period inflation for 2022, as part of the re-jigging of the entire macroeconomic framework, has been necessitated by a significantly-changed macroeconomic environment.

    He said based on the developments for the first six months of 2022 and outlook for the rest of the year, the government has, accordingly, revised the macro-fiscal targets for 2022 as follows.

    Figures released by the Ghana Statistical Service, (GSS), indicate that year on year inflation measured by the Consumer Price Index, (CPI) has increased slightly to 31.7 percent for the 12months period ended July, 2022 from 29.8 percent recorded in June, 2022.

    This means that between June 2022 and July 2022, prices of goods and services have gone up by 31.7% indicating a 1.9% increase.

    Government statistician Prof. Kobina Annim made the announcement when he addressed journalists on August 10, 2022.

    “We composed this from two perspectives, the food and non-food inflation and from a domestic and imported perspective. From the food and non-food inflation we recorded food inflation of 32.3% and 31.3% for non-food inflation.”

    “From the domestic perspective we recorded 29.2% and imported inflation of 31.3%.”

    This has been attributed to the increasing depreciation of the cedi which has led to the increase in the cost of imports.

    Imported goods such as cooking oil and gasoline due to the war in Ukraine, dollar strength and extreme weather caused the rise in the inflation rate from 29.8 percent in June.

    Fitch has downgraded Ghana’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to ‘CCC’ from ‘B-‘.

    The downgrade reflects deterioration of Ghana’s public finances, which has contributed to a prolonged lack of access to Eurobond markets, in turn leading to a significant decline in external liquidity.

    In the absence of new external financing sources, international reserves will fall close to two months of current external payments (debits in the current account) by end-2022. However, Fitch, typically, does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

    “Ghana faces USD2.75 billion of external debt servicing in 2022, including amortisation and interest, and USD2.8 billion in 2023”, Fitch Ratings estimates. “Access to external financing will remain tight, as Ghana is likely to remain locked out of Eurobond markets, which had come to be a regular source of external financing for the government.”

  • Bokpin backs Fitch; warns govt against drawing from reserves

    Bokpin backs Fitch; warns govt against drawing from reserves

        

    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.”