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Fitch Affirms Ghana’s B’ Rating
 
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31-Mar-2016  
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Rating Agency, Fitch, has affirmed the country’s credit ratings at B, but with a negative outlook, saying the economy is still exposed to serious shocks due to rising external deficits and fears of spending outside the approved budgets this year.

Fitch has also warned that further drop in commodity prices could seriously affect the economy in the coming months.

The agency, however, stated that growth could only pick up this year if the commodity prices as well as crude oil production from Tweneboa,Enyenra and Ntomme(TEN) and the Jubilee oil fields improve in the coming months.

Fitch also affirmed the issue ratings on Ghana's senior unsecured foreign and local currency bonds at 'B', as well as the 'BB-' rating on Ghana's USD1bn partially guaranteed note.

Ghana's Country Ceiling and the short-term foreign currency IDR have been affirmed at 'B'. key rating drivers.

The ratings and Outlook reflect the following factors: Ghana's fiscal and external deficits leave the country vulnerable to domestic and external shocks, including low oil prices and tight financing conditions.

The result has been lower growth (4.1 per cent in 2015), and a public debt to GDP ratio of 72 per cent, well above the 'B' median of 47 per cent. Fitch forecasts that economic growth will increase to 5.4 per cent in 2016 and that public debt will peak this year. However, downside risks remain.

Fiscal slippage ahead of the November elections would increase inflationary and financing pressures. A further decline in commodity prices would negatively impact growth and exacerbate Ghana's twin deficits.

The Ghanaian authorities made significant progress on fiscal consolidation in 2015, narrowing the fiscal deficit to an estimated 7.2 per cent of GDP, from 10.2 per cent in 2014.

Fiscal reform agenda

The country's fiscal reform agenda is supported by an $918mn Extended Credit Facility arrangement with the IMF, with which Ghana successfully concluded its second review in January.

 The fund programme helped the government keep expenditures in line with revised 2015 budget while earning revenues in excess of what was forecast in the budget.

The 2016 budget calls for a further narrowing of the deficit to 5.3 per cent of GDP. However, Fitch believes that the narrowing will be smaller and forecasts a 2016 fiscal deficit of 6.3 per cent. The 2016 growth outlook is dependent on a combination of domestic and external factors. 

Domestically, oil and gas production will increase as the TEN oil fields come online in August and add 23,000 barrels per day in oil production and associated gas exploitation will bring an approximately 50 per cent increase in gas production.

Externally, lower global commodity prices, notably oil and gold, would damage export receipts. Downward pressure on the exchange rate and overall forex volatility has also served to dampen growth and increase external pressure. In Fitch's view, the Ghanaian cedi will experience greater stability in 2016 and lower levels of depreciation.

The agency expects the cedi to trade at an average exchange rate of 4.1/USD; this would be a depreciation of about eight per cent from the 2015 average compared with the 22 per cent depreciation that the cedi experienced in the previous year. 

Policy rate

In its most recent Monetary Policy Committee (MPC) meeting, the Bank of Ghana chose to keep the monetary policy rate at 26 per cent, where it sits after five rate hikes in 2015.

 The MPC noted that exchange rate stability had contributed to February monthly inflation dropping slightly to 18.5 per cent from 19 per cent in January.

Inflation expectations remain high and the current level is still well above the target band of 8+/- 2 per cent. For these reasons, Fitch expects the central bank to maintain a relatively tight monetary policy in 2016, which will be supportive of greater price and exchange rate stability.

The depreciating exchange rate has led to deterioration in the asset quality of the Ghanaian banking sector. The ratio of non-performing loans (NPL) to total loans increased from 11 per cent in June 2015 to 14 per cent by October. 

Non-Performing loans

Increasing NPLs are a risk, but overall, the Ghanaian banking sector remains liquid and well capitalised. The rating is constrained by low GDP per capita, which, at $1,313, is less than half the 'B' median.

However, the 7.2 per cent annual growth rate that Ghana experienced in 2005-14 substantially increased the country's performance on human development indicators.

The main factors that individually, or collectively, could trigger negative rating action include failure to consolidate the budget deficit and stabilise debt levels, or to ease domestic financing conditions; failure to stabilise international reserves; and failure to improve macroeconomic stability in particular to control inflation. The outlook is negative.

Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. 

Key assumptions 

Fitch assumes that Ghana's new oil production comes on stream towards the end of the forecast horizon; the continued development of the gold sector; and further investment in infrastructure.

Fitch assumes Brent oil prices will average USD35 in 2016, USD45 in 2017 and will rise gradually. Fitch assumes an IMF programme remains in place through the 2016 elections.
 
 
 
Source: Daily Graphic
 
 

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