Fitch Ratings Says Ghana Faces Challenging Times Ahead Of Prospective Oil Producer Status

Fitch Ratings – London-10 July 2009: In a new sovereign credit report Fitch Ratings says that Ghana faces challenging times as it seeks to equate a dearth of private external capital inflows with high fiscal and external financing needs.

“While the recent discovery of oil points to a brighter medium term outlook, there is a compelling case for a new IMF agreement to help bridge Ghana’s external financing needs in 2009-10 and stabilise sovereign creditworthiness” says Paul Rawkins, Senior Director in Fitch’s London-based sovereign rating team. Fitch revised the Outlooks on Ghana’s Long-term foreign and local currency Issuer Default Ratings (IDRs) of B+ to Negative from Stable in March 2009.

Fitch says the peaceful transition of power from the narrowly defeated New Patriotic Party (NPP) to the victorious National Democratic Congress (NDC) following elections in December 2008 marked a further milestone along the road to political maturity for Ghana. However, this outcome was marred by a recurrence of election-induced policy indiscipline which put sovereign creditworthiness at risk. Poor fiscal outturns have been a feature of Ghana’s public finances since its last IMF programme expired in 2006. Ghana enjoyed strong growth of 7.3% in 2008, but rapid credit growth and lax fiscal policy contributed to unsustainable fiscal and current account deficits of 14.5% and 21.5% of GDP, accompanied by double digit inflation that remains close to 20%.

Challenging Times Ahead For Ghana

The new government has sent a strong message of fiscal intent with an ambitious budget aimed at reining in the deficit to 9.4% of GDP in 2009, while the Bank of Ghana raised interest rates to 18.5% in February. Even so, Fitch believes that Ghana will face tight fiscal and external financing constraints in 2009-2010, intensified by a near stop in private external capital inflows which has already led to a sharp fall in international reserves. Continuing high fiscal deficits point to a public debt/GDP ratio of 60% by end-2009, up from a low of 37% in 2006 and more than twice the ‘B’ median of 28%. Likewise, projected gross external financing needs of 124% of international reserves in 2009 will be more than double the ‘B’ median of 58% and the third highest in the ‘B’ range after Sri Lanka and Jamaica.

Ghana continues to enjoy a high level of donor support (9% of GDP in 2008), while the 2008 elections cemented the country’s reputation as one of the few genuinely functioning democracies in Africa. These factors, coupled with the NDC’s realistic appraisal of the near-term economic outlook, have smoothed Ghana’s path to the IMF and the two sides are reportedly close to agreement on a new programme. Fitch says an IMF agreement would not provide direct support to the budget, but it would help close the external financing gap and instil greater macroeconomic stability in the current uncertain global economic environment. An IMF agreement could also provide the government with the necessary breathing space to tackle unpopular structural reforms and put public finances on a more sustainable footing before Ghana starts to reap the fruits of its new found oil wealth.

The recent discovery of oil, with an expected start-up date of late 2010, holds out the prospect of Ghana becoming a modest hydrocarbons producer and exporter towards 2013. Fitch acknowledges that the ensuing accelerated growth and development and higher government revenues would have the potential to enhance Ghana’s sovereign creditworthiness over time. However, the agency says that much will depend upon the authorities’ capacity to manage this new revenue stream and the manner in which it navigates the more difficult intervening years of 2009-2010.