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Ghana’s slow fiscal consolidation may add to rating strains, Fitch Ratings


Ghana’s plans to pursue fiscal consolidation more slowly than the government had previously indicated may lead to a higher public debt trajectory and could be a source of downward pressure on the country’s ratings, although the projections need to be seen in the context of upcoming elections, Fitch Ratings says.

The government’s revised budget, approved by parliament on 7 August, forecasts the deficit to reach 11.4% of GDP in 2020, up from 4.7% in its initial budget. The 2021-2024 budget guidelines released on 17 August indicate that the 2020 fiscal deficit could rise even higher to 12.2% of GDP. The finance minister has received parliamentary approval for a temporary suspension of the 5%-of-GDP deficit ceiling stipulated in the Fiscal Responsibility Act (FRA).

Fitch had expected a substantial, temporary deterioration in the budget balance in 2020, in line with the shock from the coronavirus pandemic. However, the pace of fiscal consolidation over the medium term outlined in the government’s latest forecasts represents a bigger departure from its assumptions. Projections in the budget guidelines suggest that the deficit will remain above the 5% ceiling until 2022, but still record a primary deficit even in 2024, against the FRA requirement of a primary surplus. A failure to substantially narrow fiscal deficits in 2021-2024 may result in a significant increase in the ratio of public debt to GDP.

Ghana’s ratios of public debt and interest costs relative to fiscal revenue are very high compared with the median for other ‘B’ rated sovereigns, pointing to the urgency of fiscal consolidation. In April, when Fitch affirmed Ghana’s rating at ‘B’, with a Stable Outlook, it highlighted a weakening of public finance metrics relative to the base-case scenario, for example due to failure to implement a credible consolidation strategy after the election in December 2020, as a factor that could lead to negative rating action.

The government’s projections may signal that the coronavirus crisis has weakened the administration’s previous commitment to a fiscal adjustment beginning in 2021. Nevertheless, the medium-term fiscal forecasts are subject to a high degree of uncertainty. Notably, the general election could influence the direction of policy.

Ghana’s issuance of a USD3 billion Eurobond in February supports its short-term external liquidity position. The IMF also approved a USD1 billion emergency Rapid Credit Facility for the country in April. The central bank’s financing of part of the fiscal deficit further eases the need for external funding.

Liquidity pressures may increase in 2021, partly because risks associated with the central bank’s deficit financing will increase if the latter is sustained at a high level. The government on average borrowed GHS1.3 billion (slightly more than 1% of GDP) from the Bank of Ghana annually in 2011-2016, which allowed for greater fiscal deficits and contributed to higher inflation through the fiscal dominance of monetary policy.

Insufficient progress on fiscal consolidation could add to external strains, particularly if it affects the confidence of non-resident investors in the sustainability of Ghana’s public finances, potentially impeding the country’s ability to access markets.

Ghana’s external financing position may become a source of rating pressure, should external strains mount and multilateral support not be forthcoming. The country’s high external debt means that any sharp depreciation of the cedi would significantly increase the sovereign’s debt servicing burden.

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