MacroEconomic Analysis: Moody’s that Ghana’s Commodity Dependence Is Straining Her Already Weak Credit Profile…

debt-detailed-statistics

Ghana-GDP-2015-Debt
Moody’s Investors Service downgraded Ghana’s sovereign rating and put the country on a negative outlook to reflect an increasing debt burden, large fiscal imbalances and a sharp weakening of the cedi currency.  The downgrade from by one notch to B3 from B2 comes despite an agreement with the International Monetary Fund in February for a three-year $940 million financial assistance programme designed to restore fiscal stability.

It is a further blow to the economic reputation of the West African country, which for years saw strong growth rates due to its exports of gold, cocoa and oil but faces a raft of macroeconomic problems.These include inflation that stood at 16.5 per cent in February, a currency that has fallen 9 per cent this year after a 31-per cent fall in 2014 and a fiscal deficit the government says will decline to 7.5 per cent by the end of the year.  “The first driver of the downgrade is Ghana’s deteriorating fiscal strength as reflected in the significant increase in the government debt ratio to an estimated 67.2 percent of GDP in 2014 from 54.8 per cent in 2013,” Moody’s said in a statement.

“The negative outlook reflects further downside risk to the country’s debt dynamics and liquidity pressure in the short-term if the country’s policies fail to successfully contain its fiscal deficit, stabilise its currency and address current impediments to higher economic growth,” it said on Thursday.

The government of President John Mahama says Ghana has strong medium-term prospects in part due to an expected increase in oil and gas production in the next three years and says its policies backed by the IMF will restore macroeconomic stability.

Ghana is constrained by her exposure to commodities, strained public finances and external vulnerabilities.  Ghana’s high debt and deficit levels are a key drag on its credit quality, and was downgraded by one notch in 2014.  Moody’s conclusions were contained in a just-released report, “Ghana, Government of and Mongolia, Government of: Commodity Dependence Strains Weak Credit Profiles”.

Ghana has abundant natural resources that have attracted high levels of foreign investment and have produced rapid economic growth. However, dependence on natural resources has exposed the economy to volatility in commodity prices and shifts in investor sentiment, undermining growth prospects in the country and straining government finances.  In addition, downward pressures on exports and capital inflows have reduced foreign-exchange reserve buffers.

While both countries will face heightened external pressures from sovereign bond repayments in the coming years, falling commodity prices will hurt Ghana a lot more, given the her position as a net oil exporter. Weak fiscal management is also a shared credit risk, but while Mongolia’s fiscal performance is strongly correlated with commodity cycles, Ghana’s public finances outcomes are more closely tied to electoral cycles.  Moody’s further notes that Ghana’s public finances remain strained, as seen in its much heavier debt burden and weaker debt affordability metrics. Ghana’s, interest payments comprise a 23% for Ghana — but this relative strength is diminishing as interest payments rise and mineral and corporate tax revenues decline.

Moody’s Investors Service downgraded Ghana’s sovereign rating and put the country on a negative outlook to reflect an increasing debt burden, large fiscal imbalances and a sharp weakening of the cedi currency.  The downgrade from by one notch to B3 from B2 comes despite an agreement with the International Monetary Fund in February for a three-year $940 million financial assistance programme designed to restore fiscal stability.

It is a further blow to the economic reputation of the West African country, which for years saw strong growth rates due to its exports of gold, cocoa and oil but faces a raft of macroeconomic problems.

These include inflation that stood at 16.5 per cent in February, a currency that has fallen 9 per cent this year after a 31-per cent fall in 2014 and a fiscal deficit the government says will decline to 7.5 per cent by the end of the year.

“The first driver of the downgrade is Ghana’s deteriorating fiscal strength as reflected in the significant increase in the government debt ratio to an estimated 67.2 percent of GDP in 2014 from 54.8 per cent in 2013,” Moody’s said in a statement.

“The negative outlook reflects further downside risk to the country’s debt dynamics and liquidity pressure in the short-term if the country’s policies fail to successfully contain its fiscal deficit, stabilise its currency and address current impediments to higher economic growth,” it said on Thursday.

The government of President John Mahama says Ghana has strong medium-term prospects in part due to an expected increase in oil and gas production in the next three years and says its policies backed by the IMF will restore macroeconomic stability.

gdp-composition-breakdown

The Key Drivers:

1) Deteriorating debt dynamics as reflected by an increasing debt burden due to large fiscal imbalances and a sharp weakening of the country’s national currency, combined with reduced debt affordability stemming from a high cost of funding in the domestic market;

2) increased government liquidity risks, as the government faces large gross borrowing requirements amid more difficult domestic and external funding conditions.

The negative outlook reflects further downside risk to the country’s debt dynamics and liquidity pressure in the short-term if the country’s policies fail to successfully contain its fiscal deficit, stabilize its currency and address current impediments to higher economic growth.

Concurrently, Moody’s has changed the foreign-currency bond ceiling to B1 from Ba3 and the foreign currency deposit ceiling to Caa1 from B3. Moody’s has also changed the local currency bond and deposit country ceilings to Ba3 from Ba2.

RATING RATIONALE

RATIONALE FOR DOWNGRADE TO B3

The first driver of the downgrade is Ghana’s deteriorating fiscal strength as reflected in the significant increase in the government debt ratio to an estimated 67.2% of GDP in 2014 from 54.8% in 2013, driven by the large fiscal deficit at 9.4% in 2014, and adverse debt dynamics fueled by high domestic interest rates and currency depreciation against the US dollar. Limited fiscal and external buffers in the face of tighter US dollar liquidity, economic headwinds and terms of trade shocks increase the risk for these adverse debt dynamics to persist, in Moody’s view.

The main focus under the three-year IMF programme (recently agreed at staff level, pending IMF board approval expected in April) is fiscal consolidation via expenditure control and increased tax collection, building on the budgetary measures implemented in the 2015 budget. However, this fiscal consolidation effort will take place in the context of a slow growth environment which dampens revenue generation capacity. Ghana’s debt affordability is already among the weakest in Moody’s rated universe, with annual interest payments amounting to about one third of revenues in 2014.

The growth slowdown is being exacerbated by a significant power shortage currently amounting to almost a third of peak demand. Moody’s expects a more muted fiscal consolidation path over the next two years than envisioned by the government in view of significant investment needs to resolve the power crisis, in addition to the election cycle in 2016 which has historically coincided with expenditure overruns.

The second driver of the downgrade reflects increased government liquidity risk in view of large gross borrowing requirements amid more difficult domestic and external funding conditions. In particular, higher prevailing risk premia than in October 2014 during Ghana’s most recent Eurobond issuance add to the challenges of returning to the international markets ahead of the $530 million Eurobond maturing in 2017, notwithstanding the establishment of a Sinking Fund aimed at assisting with future debt repayments. On the domestic side, large domestic rollover needs and a front-loaded issuance calendar have driven interest rates to over 26% in the short-term T-bill segment. The IMF programme also reduces the scope for central bank support in financing the current year fiscal deficit.

Moody’s notes that balance of payments risks are partially mitigated by the $940 million IMF programme (equivalent to 2.4% of GDP). Adverse terms of trade shocks with respect to the country’s main exports, gold and oil, weigh on both the fiscal and external accounts. According to the revised 2015 budget, lower oil prices will cost the government revenues of about 2 percentage points of GDP. At the same time, Moody’s expects sufficient foreign direct investment and other capital flows to fund most of the anticipated large current account deficit this year and next. As a result, the country should be able to maintain foreign exchange reserve coverage of imports at between 2.5 and 3 months on a gross basis during that two-year period, even as net reserves excluding the Bank of Ghana’s FX swaps with resident banks and bridge loans with external counterparties remain low.

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

The rationale for keeping a negative outlook is the prospect of worse than expected debt dynamics taking hold if budgetary outcomes are much worse than anticipated and if the exchange rate does not stabilize in the near term, with concomitant pass-through to inflation and high domestic interest rates.

The negative outlook also captures the increased uncertainty generated by the maritime border dispute with Côte d’Ivoire for the development and exploitation of the TEN oil field which the government now expects to come on-stream in the second half of 2016. Coupled with the Sankofa offshore gas project further east that is scheduled to commence production in 2017, increased oil and gas production should otherwise ease the downward pressures on the country’s foreign exchange buffers and support medium-term growth prospects.

WHAT COULD CHANGE THE RATING UP/DOWN

Downward pressure on the rating could arise from factors that include (1) continued delays in fiscal consolidation or in the resolution of the power crisis; (2) a sustained decline in oil or gold prices that would put further downward pressure on fiscal revenues and export receipts; (3) sustained loss of market access; (4) continued pressure on the balance of payments and on international reserves.

A return to a stable outlook on Ghana’s sovereign rating could develop as a result of: (1) accelerated and sustained fiscal consolidation that would stabilize the government’s debt burden, supporting a gradual reduction over the medium term; (2) a strengthening of FDI inflows as a source of funding for the country’s large power and infrastructure investment needs; (3) a bolstering of Ghana’s foreign-exchange and/or fiscal reserves that would reduce the country’s vulnerability to domestic or external shocks.

GDP per capita (PPP basis, US$): 4,173 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.2% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 17% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -9.4% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -9.2% (2014 Actual) (also known as External Balance)

External debt/GDP: 44.6% (2014 Forecast)

Level of economic development: Moderate level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 16 March 2015, a rating committee was called to discuss the rating of the Ghana, Government of. The main points raised during the discussion were: The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on http://www.moodys.com for a copy of this methodology.

Related Web References:

https://www.moodys.com/credit-ratings/Ghana-Government-of-credit-rating-806356876

https://www.moodys.com/research/Moodys-downgrades-Ghanas-sovereign-rating-to-B3-outlook-negative–PR_321192

https://www.moodys.com/research/Moodys-downgrades-Ghanas-sovereign-rating-to-B2-outlook-negative–PR_302756

https://www.moodys.com/research/Moodys-changes-outlook-on-Ghanas-B1-sovereign-rating-to-negative–PR_287940

http://www.bloomberg.com/news/articles/2014-06-28/ghana-s-credit-rating-cut-to-b2-on-rising-debt-ratio-by-moody-s

http://www.tradingeconomics.com/ghana/rating

http://www.reuters.com/article/2015/03/20/ghana-ratings-moodys-idUSL6N0WM1VI20150320

https://www.ghanabusinessnews.com/2015/06/05/ghanas-credit-worthiness-constrained-by-high-government-debt-other-factors-moodys/

http://ghanawaves.com/business/item/6013-moody%E2%80%99s-downgrades-ghana%E2%80%99s-rating-to-b3

http://www.euromoney.com/GatewayAd.aspx?Redirect=http%3a%2f%2fwww.euromoney.com%2fArticle%2f3291904%2fCapital-flows-Ghana-rating-actions-show-African-currency-risks.html

http://www.ftseglobalmarkets.com/news/tullow-ratings-downgraded-by-moodys-as-ghanas-rating-falls.html

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11491782/Tullow-Oil-hit-by-ratings-downgrade-on-Ghana-risk.html

http://ghanatrade.gov.gh/Latest-News/moodys-says-ghanas-creditworthiness-constrained-by-high-debt-external-vulnerability.html

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About Anang Tawiah

About the author :: Anang Tawiah is a New York City based Management Consultant specializing in Investment Risk and Technology Strategy. He continues to guide many Blue chip companies and Governments as a Business and Technology Consultant. Please direct all follow up questions, concerns, request for speaking engagements and presentations regarding my articles and research to my Facebook Page listed below. You can read more of his analysis or reach him for further professional consultations and or guidance at: // Email: anang@labaddi.com // Follow me on Wordpress: www.anangtawiah.com // Follow me on Facebook: www.facebook.com/AnangTawiah

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