Fitch Ratings has downgraded Ghana's Long-term foreign and local currency IDRs and its senior unsecured ratings to 'B' from 'B+'. The Outlook is Stable. The Country Ceiling has also been downgraded to 'B' from 'B+'. The agency has affirmed the Short-term foreign currency IDR at 'B.'
KEY RATING DRIVERS
The downgrade of Ghana's IDRs reflects the following key rating drivers and their relative weights:-
High:
Ghana's creditworthiness has been further weakened by the government's failure to fully implement its fiscal consolidation plan in 2013. This follows a sharp widening in the budget deficit to 11.8% of GDP from 4% in 2011 and rising debt levels, which as a percentage of GDP have risen to 48.8% between 2011 and 2012 from 38.3%. The authorities continued to overrun on wages, interest costs and arrears, leading Fitch to expect that the government will fail to meet the 9% of GDP fiscal deficit target for this year. However, the decision to sharply increase utility tariffs and scrap the fuel subsidy reduces the risk of an overrun in the coming fiscal years.
Ghana's external vulnerability has increased since the rating was last reviewed in February 2013. Fitch forecasts that lower gold prices and still strong import demand will put further pressure on external balances. Fitch expects the current account deficit to widen to 13.1% of GDP in 2013, from 12% in 2012. The agency does not expect capital inflows to keep pace with the widening current account deficit, keeping foreign reserves under pressure. Import cover is forecast to remain at 2.9 months, leaving Ghana exposed to exogenous shocks.
Medium:
Policy credibility has been significantly weakened, following two years of larger-than-expected budget deficits. This has exerted pressure on the exchange rate through the large current account deficit. Monetary policy adjustment has not been successful in curbing inflation, with inflation rising above the upper limit of the Bank of Ghana's inflation target. Domestic financing pressures are highlighted by elevated domestic bond yields of 20%, undermining the sustainability of government finances. Domestic debt represents 48% of total government debt. The potential withdrawal of foreign participants, which hold 26% of domestic debt (56% of foreign reserves), increases Ghana's vulnerability.
Ghana's 'B' IDRs also reflect the following key factors:-
The ratings are supported by Ghana's strong governance track record and democratic history, highlighted by peaceful power transfers and respect for judicial due process.
Ghana's business environment compares favourably with even 'BB' median countries. This is reflected in Ghana's ability to attract foreign direct investment, which at 7% of GDP is well above that of Nigeria, Gabon, Zambia, Kenya and Angola.
A decade of growth in excess of 7% has resulted in an improvement in social indicators, but relative to 'B' peers per capita income and measures of human development are still weak by comparison. Per capita income of USD1,754 in 2013 is 60% of the 'B' median, while Ghana's UN Human Development Index ranking improved to the 28th percentile from the 17th (2010), it is still below the 'B' median of 41st.
RATING SENSITIVITIES
Positive: the main factors that individually, or collectively, could trigger positive rating action include:
-A faster-than-expected and sustained fiscal consolidation that significantly reduces the debt burden over the medium term
-A significant improvement in international reserves to reduce Ghana's vulnerability to external shocks
Negative: the main factors that individually, or collectively, could trigger negative rating action include:
-A further deterioration in public and external finances which puts debt on an unsustainable path and jeopardies Ghana's external financing capacity
-An extended period of below trend growth which erodes debt sustainability
KEY ASSUMPTIONS
Fitch assumes Ghana's GDP growth will remain robust, averaging between 6% and 7% in the medium term. Growth prospects will depend on oil production coming on stream as expected, increasing to 200,000 barrels per year by 2016/17; the continued development of the gold sector; and further investment in infrastructure. On this basis, key debt ratios are eventually expected to stabilise around current levels.
Fitch assumes that some fiscal consolidation will take place, albeit at a slower pace than the authorities' projections.
Favourable growth forecasts and a sustainable external position assume no sustained deep fall in commodity prices.
