Fitch Ratings has affirmed Ghana's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook.
KEY RATING DRIVERS
Ghana's ratings reflect strong growth prospects, improving macroeconomic stability, and strong governance indicators relative to rating category peers, balanced against high public and external debt levels, low per capita GDP, and weak development indicators.
The fiscal deficit remains above peers, but has narrowed; however, difficulty raising revenue and debt overhang pose substantial risks to further consolidation. In 2017, the cash deficit shrank to 5.9% of GDP and Fitch forecasts the deficit to narrow to 5.5% of GDP in 2018 on lower capital expenditure and slightly lower interest payments. The deficit reduction was aided by measures enshrined in the New Public Financial Management (PFM) Act, 2016, which addressed some of the PFM and budgeting deficiencies that led to consecutive years of substantial arrears accumulation.
Preliminary fiscal outturns through May 2018 show the government is broadly in line with its deficit target of 4.5% of GDP. However, the cost of a clean-up of the financial sector and the expected clearance of payment arrears will raise the deficit over the remainder of the year. Fitch expects the deficit to narrow further in 2019, but believes that possible fiscal slippage ahead of the 2020 election poses a downside risk. In the last two election years, the general government cash deficit widened by 2.8pp points in 2016 and 7.5pp in 2012.
The quality of Ghana's fiscal adjustments will continue to be affected by the government's difficulty in raising revenue. Revenues (total revenue and grants) peaked at 23% of GDP in 2015 and domestic tax revenue has stagnated at an average of 16% of GDP in 2013-2017 after rising from an average of 12.7% in 2001-2010. The government has made efforts to increase tax receipts through administrative reforms, but most of the deficit reduction has been accomplished by under-execution of expenditure.
Fitch forecasts general government debt to fall to 69% of GDP by end-2018, above the current 'B' median of 65%, but below the peak of 73% in 2015 and 2016. The end-2018 figure includes debt of 2% of GDP in the form of the Energy Sector Levy Act (ESLA) bond, which was issued through a special purpose vehicle to help clean the balance sheets of state-owned energy companies. There are outstanding payment arrears of an additional 1.6% of GDP, which the government plans to clear by 2020. The government's ability to issue domestic debt at longer maturities has improved the debt profile and will lower interest payments, but debt maturities in 2018 remain high, at 19% of GDP, compared with the historical 'B' median of 5.5%. Debt/revenue is also high, at 337% compared with the current 'B' median of 287%.
An IMF Extended Credit Facility has supported the government's efforts to improve public finances since 2015. The government has indicated that it will not seek a follow-on programme when the current one expires in 1Q19. Fitch does not expect substantial fiscal slippage once the IMF programme has ended, but the government may make slower progress on reforms without the pressure of programme reviews.
Real GDP growth accelerated to 8.5% in 2017 from 3.7% in 2016, well above the median of current 'B' peers, which was 3.3%. High growth in 2017 was partly the result of new oil production coming on stream faster than previously expected, with production totalling 150 thousand barrels per day (kbpd), an increase of 50% from 2017, compared to the government's previous forecast of 124 kbpd. As a result, GDP growth in 2018 and 2019 will benefit less from additional production. Fitch expects that growth will stay at or above 6% through 2020 as oil production continues towards its eventual plateau. Slow credit growth will weigh on the non-oil sector. Key downside risks to growth include continued underperformance in government revenues that result in expenditure under-execution.
A decline in inflation will allow the Bank of Ghana (BOG) to continue to ease monetary policy in 2H18. CPI growth slowed to 9.6% yoy in July 2018 from an average of 12.4% in 2017. Fitch forecasts inflation to average 8% in 2018, compared with the current 'B' median of 4.8%. The central bank held the policy rate at 17% after two rate cuts totalling 300bp earlier in the year. Fitch expects one further rate cut in 2018, provided the government's fiscal consolidation efforts remain on track and there are no shocks to the inflation outlook.
Fitch views Ghana's banking sector as a weakness. NPLs were 23.4% of total gross loans in April 2018, up from 11.3% at end-2014, largely due to legacy problem loans to state-owned energy companies. While these specific loans are being addressed through the ESLA framework, weak asset quality also reflects weak operating conditions and weak lending practices. The BOG is reforming the sector, most notably through a hike in the minimum statutory capitalisation requirement to GHS400 million, from GHS120 million, which Ghanaian banks have to reach by end-2018. The BOG has revoked the licenses of seven banks and forced other smaller banks to merge to meet the new minimum capitalisation requirement.
Ghana's external metrics have improved, but remain a weakness relative to peers, and the cedi experienced some downward pressure in 1H18, in line with other emerging market currencies. Fitch forecasts a current account deficit of 4.2% of GDP in 2018, compared with an average of 9.5% in 2012-16. The narrowing has been aided by the trade balance going into surplus in 2017 due to higher gold and oil export receipts. Gross international reserves increased to USD5.9 billion as of May 2018, up from USD5.5 billion at end-2017. However, reserves constitute 2.9 months of current external payments, compared with the historical 'B' median of 3.9 months, and the liquidity ratio will fall below 80% in 2018. Fitch expects reserves to stay flat in 2018 and finish the year at USD6 billion.
The ratings are supported by World Bank governance indictors and business environment indicators that are stronger than the 'B' median. However, the ratings are constrained by low GDP per capita, which at USD1,729 is less than half the 'B' median, low human development indicators and dependence on commodity exports.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Ghana a score equivalent to a rating of 'B' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factors that could lead to positive rating action are:
- A reduction in the budget deficit and a marked decline in government debt/GDP.
- An improvement in Ghana's external position, such as a narrowing of the current account deficit and an increase in international reserves.
- An improvement in GDP per capita relative to peers.
The main factors that, individually or collectively, could trigger negative rating action are:
- Reversal of fiscal consolidation that results in a failure to reduce government debt/GDP.
- A weakening in external liquidity.
- An increase in macroeconomic instability.
KEY ASSUMPTIONS
Fitch's forecasts are for Brent crude to average USD70/b in 2018, USD65/b in 2019 and USD57.5/b in 2020, based on the Global Economic Update published in June 2018.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Short-Term Local-Currency IDR affirmed at 'B'
Country Ceiling affirmed at 'B'
Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'B'
Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'B'
Issue ratings on short-term senior-unsecured local-currency bonds affirmed at 'B'
Issue rating on Ghana's USD1 billion partially guaranteed note affirmed at 'BB-'
