S&P Downgrade: Ghana regaining investor confidence in danger

Seth TekperGhana’s hopes of regaining the confidence of investors in the economy through an International Monetary Fund (IMF) bailout programme has suffered a jolt as credit rating agency Standard & Poor’s (S&P) downgraded the country’s sovereign rating by one notch on concerns about the cost of financing the country’s high fiscal deficit and doubts about whether the government can reduce it quickly enough.

The lowering of the ratings from “B” with a negative outlook to “B-” with a stable outlook sends Ghana deeper into “junk” territory.

The B- rating is six levels below investment grade today.

In December 2013, S&P pronounced a negative credit outlook on Ghana’s “B” ratings, from a previous stable rating.

S&P highlighted that despite a successful international bond issued earlier this autumn, Ghana has gross external financing needs of 137% of current account receipts and reserves next year.

Even though Ghana is holding talks with the IMF about an economic reform and bailout package, S&P said it had a stable outlook on Ghana’s rating on the assumption that it would strike a deal that could tide it over until new oil and gas production from the Tweneboa-Enyenra-Ntomme (TEN) projects comes online.

Nonetheless, S&P’s analysts sounded a cautious note on whether an IMF programme would prove successful.

“We think the Ghanaian government will find the conditions attached to an IMF programme hard to meet, particularly with parliamentary and presidential elections coming up in late 2016,” S&P director Ravi Bhati said.

“There has been a recent slight respite due to the issuance of the Eurobond, but fundamentally, there is not a clear path out of this high fiscal deficit situation.”

The ratings agency has concerns over the possible IMF deal given that the Fund is likely to want a faster pace of fiscal consolidation than the government is able to deliver, Bhati said.

The lowering of the sovereign credit rating is contrary to government comments about the impact of a possible deal with the IMF to stabilise the economy.

When contacted by Reuters, Finance Minister Seth Terkper said the downgrade was a surprise and does not reflect government’s progress in stabilising the macro economy or prospects for the IMF deal.

He said the government was reaching convergence with the IMF on a deal, but had any way, pursued its own fiscal reforms.

It had struck a good bargain with labour unions, cleared one-time wage arrears costs and refinanced bonds.

Government revenue was hurt by a fall in gold and cocoa prices and a shortfall in gas supplies, he said.

But revenue would increase as domestic oil production picked up steam and gas started pumping from the offshore Jubilee field, so medium-term prospects are strong, he said.

“We are positive of regaining our ratings because the country will grow back to a positive growth path,” Terkper said.

The economy has grown rapidly in recent years through exports of gold, cocoa and oil but the 2014 forecast is weighed down by fiscal problems such as rising inflation, a currency that has fallen sharply and a budget deficit above 10%.

News in August of the IMF talks helped stabilise the currency which has rebounded slightly after losses of around 30% this year.

The government also secured an attractive rate for its $1 billion Eurobond and sealed a record cocoa loan.

These factors, combined with a deal with the Fund that the government hopes to strike in November, enabled government officials to reassure markets and voters about the economy. S&P, however, expressed doubts.

Ghana saw years of GDP growth above 8%, but the statistical service projected GDP for 2014 at 6.9%.

S&P put annual GDP growth in the 2014-2017 period at 6%, but even that figure is still above the Fund’s projection of 5.1% GDP for economies in Sub-Saharan Africa this year.

The S&P downgrade follows similar moves by Moody’s and Fitch in the last year. It divided opinion among analysts.

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