Ghana’s rating is supported by robust economic performance as well as a strong growth outlook. A good governance record and a favourable business environment in comparison to ’B’ rated sovereigns also underpins the rating. However, Fitch highlights that weak macroeconomic management as well as a poor fiscal track record pose concerns.
Growth is forecast to average 8.6% over the next three years. It will be boosted by rising oil production, as well as the positive spillover effects on the broader economy from the development of the oil sector. Infrastructure spending, which is needed to reduce bottlenecks, will also boost growth.
Oil production is forecast to rise to 120,000 b/d in 2013 and is expected to increase further to 600,000 b/d by 2018 according to Ghana National Petroleum Company (GNPC). Monetisation of Ghana’s gas should start in the next year according to the GNPC, lowering the cost of power. Oil and gas development are enhancing Ghana’s economic output and providing diversification. Gas production will lower the cost of power, improving competitiveness. Oil revenues should support the country’s public and external balance sheets over the medium term.
A sharp depreciation of the currency in early 2012 underscored macroeconomic vulnerabilities. The cedi fell 30% in H112 due to excess liquidity in the banking system as well as buoyant growth, highlighting the importance of maintaining prudent fiscal and monetary policy. The cedi appears to have stabilised, supported by Central Bank policy intervention as well as foreign demand for domestic bonds. Previous bouts of macroeconomic instability have forced unnecessary adjustment costs on the Ghanaian economy, particularly in post-election years.
In the past, Ghana’s public finances have suffered election-related fiscal slippages, most notably in 2008. In 2012, another election year, the authorities expect the deficit to widen to 6.7% of GDP, up from the original budgeted deficit of 4.8% of GDP. This reflects a combination of repayment of arrears totalling 2.7% of GDP, 18% public-sector wage increases as well as increased energy subsidies. Reforms, in particular those to expenditure management that would strengthen budgetary monitoring and control have progressed more slowly than anticipated and need to be completed. Political will as well as tight expenditure management will be required in the coming months to ensure that further slippages do not occur.
Ghana’s external position remains vulnerable due to high and persistent current account deficits and low external liquidity. The import coverage ratio is low and has deteriorated to 2.4 months, due to Bank of Ghana’s decision to intervene in the currency market in early 2012. This highlights the limited room for the central bank to intervene in the FX market, and as such, another bout of significant cedi depreciation would be a source of concern, particularly if it was accompanied by fiscal mismanagement. Due to a large current account deficit, the Bank of Ghana will have little scope to build substantial reserves
Continued policy mismanagement leading to further fiscal slippage, a depreciation of the currency and loss of reserves would put downward pressure on the rating. Lack of a credible fiscal strategy post-election would also weigh on the rating. On the other hand, continued strong growth, combined with a convincing track record of good macroeconomic management and fiscal consolidation could put upward pressure on the rating.
