S&P: Ratings On Ghana Affirmed At 'B/B'; Outlook Stable
November 21, 2012
•The Republic of Ghana benefits from strong GDP growth, increasing oil production volumes, and a 20-year track record of political stability and democracy.
•However, the ratings are constrained by high current account deficits and a relatively low external reserves position, high government debt stock and ongoing fiscal challenges, and low GDP per capita.
•We are affirming our 'B/B' long- and short-term foreign and local currency sovereign credit ratings on Ghana.
•The stable outlook balances our expectation of resilient GDP growth and rising oil-related revenue against persistently large fiscal and external financing needs. It also assumes that there will be no significant increase in political tensions after the December 2012 elections.
Standard & Poor's Ratings Services today affirmed its 'B' long-term and 'B' short-term foreign and local currency sovereign credit ratings on the Republic of Ghana. The outlook is stable. The transfer and convertibility (T&C) assessment is 'B+'.
The ratings are constrained by the country's high current account deficits, relatively low external reserves position, high government debt stock, and ongoing fiscal challenges. The ratings are also constrained by low GDP per capita and--despite oil production commencing--a still-narrow economic profile. The rating is supported by our view of Ghana's track record of political stability and its democracy, strong GDP growth, and strengthening oil production volumes (which over the medium term will likely support improved fiscal and external balances).
Ghana currently faces vulnerabilities on its external accounts. Despite oil production (about 80,000 barrels per day in 2012) starting in 2010, we expect the current account will remain in deficit over 2012-2015, at an average of around 9% of GDP, because of oil-industry-related imports and general imports. Strong import demand, relatively loose monetary policy, high inflation, and fiscal expansion in the first half of 2012 led the Ghanaian cedi to fall by about 19% against the U.S. dollar. The currency instability also forced the central bank to spend about one-fifth of its reserves in an attempt to stem the depreciation, highlighting the external vulnerabilities. We estimate that gross external financing needs are 110% of current account receipts and usable reserves in 2012, while usable reserves are estimated to cover only about three months of current account payments.
Ghana's fiscal deficit (on a cash basis) narrowed to 4.4% of GDP in 2011 (after a deficit of 7.4% in 2010), but we forecast it to widen again to about 7.0% in 2012. The government adopted a supplementary budget in mid-2012, which raised the planned 2012 fiscal deficit target owing to a roll-back in electricity prices, wage increases, and arrears repayment. We therefore believe that comprehensive fiscal consolidation is still to be demonstrated. This is of concern as Ghana's general government debt stock stands at a relatively high 41% of GDP. It is possible that the forthcoming elections may further erode fiscal discipline; because of how close the elections are likely to be, the government may have begun to ramp up spending even further in the last few months of this year. In addition, pressure on government spending is heightened by intense popular demand to improve public services.
The Multilateral Debt Relief Initiative contributed to a significant reduction in the general government debt in 2006, but the public sector has been re-leveraging rapidly ever since; general government debt is forecast to reach 44% of GDP in 2015 (from 26% in 2006). The rise in debt stock would be even higher if Ghana had not seen double-digit inflation and strong nominal GDP growth of about 20% annually in recent years.
The emergence of the oil sector, along with good performance in Ghana's other key export sectors (such as gold) and dynamic domestic demand should lead to real GDP per capita growth averaging a strong 4.9% in 2012-2015 and will help contain the rise in fiscal debt ratios in the medium term. Receipts from the oil sector should begin to improve fiscal flexibility in the medium term, provided that spending can be contained. Ghana has also established stabilization and savings funds (which will be allocated 21% and 9% of oil revenues, respectively, above an estimated benchmark price). Over the medium term, we believe these funds should help cushion the fiscal impact of a possible oil price shock.
The government paid off a substantial portion of arrears owed by state-owned Tema Oil Refinery, to Ghana Commercial Bank, a key player in the domestic banking sector. In doing so, it stabilized the banking sector. Nonperforming loans in the domestic banking sector fell from an estimated 17.6% at end-2010 to 14.1% in 2011 and have fallen further to 13.1% in March 2012.
Having introduced multiparty democracy 20 years ago, Ghana is now one of Africa's most established democracies, with both major parties having taken a turn at relinquishing power after losing elections. While we think the elections in December may pose fiscal challenges, we believe the elections themselves are likely to go smoothly and in adherence to the constitution.
The stable outlook balances our expectation of resilient GDP growth and rising oil-related revenue against persistently large fiscal and external financing needs. It also assumes that there will be no increase in political tensions after the December 2012 elections.
We could consider lowering the ratings if fiscal and external balances deteriorate. Downward pressure could also build if growth falters or political tensions rise substantially.
Conversely, prudent use of oil revenues, strong growth, renewed fiscal consolidation, and continued repayment of arrears could lead us to consider an upgrade.
Company — Ghana
Full nameRepublic of Ghana