Doesn't Ghana deserve a higher rating than B+?

By:
Matthew Turner
Published on:

ECR analysis paints a more bullish outlook, compared with Fitch and Moody's, thanks to favourable debt and growth prospects relative to similarly-rated sovereigns.

Investors received an early warning of Ghana’s deteriorating fiscal position and widening budget deficit from analysts participating in Euromoney’s Country Risk (ECR) survey – a real-time measure of risk sentiment across 186 markets.

ECR economists downgraded Ghana’s overall risk assessment score by 1.2 points, to 44.8 in 2012. This decline compares unfavourably with the average ECR score for sub-Saharan Africa, which improved by 0.7 points last year.

The sovereign’s ECR score decline was not enough to upset Ghana’s position in the ECR ranking, which remains stable and unchanged in 2012. With a global rank of 77, Ghana now sits in the upper bound of ECR Tier 4, alongside Romania, Kazakhstan and Morocco.

Countries in ECR’s Tier 4 score between 36 and 49.9, and are usually equated with a credit rating ranging from B- to BB+, a level which ranges between a highly speculative investment grade and non-investment grade speculative.

By calculating the average ECR score of B+ and BB- rated sovereigns, Ghana’s ECR score of 44.8 equates with a BB- credit rating. This means Ghana’s ECR score and global rank is rated one notch higher than Fitch’s B+ and Moody’s B1 credit rating, outperforming the B+ average of 38.8 by six points.




Therefore, was Fitch’s decision to lower Ghana’s B+ outlook to negative this week premature? Or is Ghana’s ECR score heading for a downward spiral?

Credit rating rationale

An overspend on public sector wages, lower than expected corporate income tax receipts and fuel subsidies were the largest contributors to the country’s widening deficit

Fitch’s decision to lower Ghana’s outlook to negative was in large part due to this election-related fiscal slippage, which led to the sovereign’s budget deficit widening by 5.4% of GDP from the government’s original target of 6.7%.

According to ECR calculations, Ghana’s budget deficit of 12.1% compares unfavourably to the B+ average of 7.7%, while the country’s general government debt of 47% of GDP falls below the B median threshold of 37%. However, on the plus side, Ghana’s real GDP growth of 8.8% exceeds the B median growth of 5.9%.



The country’s election, held on 7 December 2012, saw the government pledging greater public expenditure on civil servant salaries and boycotting fiscal consolidation measures, leading to a loss of fiscal control and reduced fiscal credibility.

Nana Ampofo, economist at Songhai Advisory and of ECR’s expert panel, explains: “There were a lot of spending reforms in the pipeline, from revenue raising measures to tightening up controls on expenditure, but obviously no country is going to allow a lack of expenditure to risk an electoral result.”

“Ghana has also had a long-standing public sector pay reform, so they have been moving people from civil servant wage structures onto the single spine system, which meant an increase in wages for a lot of people,” Ampofo adds.

The changes to the public sector wage structures added excess payments of Ghanaian cedi GHS2.7bn, according to the Central Bank of Ghana. Public sector wages now account for approximately GHS7.5bn of total government expenditure.

According to Carmen Altenkirch, sovereign director at Fitch, the main reason for the massive deterioration in the budget was due to “an over-run on current expenditure.”

“Public sector wages increased by 18% and the introduction of the Single Spine Salary Structure led to a harmonisation of pay across the civil service,” creating a further strain on the government’s already burdensome public sector wage bill,” she says.

“There were also significant increases in fiscal transfers for fuel and utility subsidies and lastly the government incurred a significant increase in arrears,” says Altenkirch. These factors led the government’s tax revenue’s slipping by GHS0.8bn to GHS11.6bn in 2012.

Policy proposals

Now that the election is over, a concrete fiscal consolidation plan will be the most pressing concern for the outgoing government if Ghana wants to restore fiscal creditability, boost investor confidence and regain its stable outlook.

“During the course of this year and next year, if Ghana effectively implements fiscal consolidation we would consider returning the rating to a stable outlook,” says Altenkirch.

Ampofo would like to see the government better equipping revenue authorities in order to maximise potential oil revenues. “$300 million is overdue in taxes from oil companies. I think the government is now going to have to put additional pressure on the oil companies to except the changes in fiscal terms,” he says.

“The Petroleum Revenues Management bill was created to boost transparency in the revenue collection system. They calculated that $300 million hasn’t yet been paid by the oil companies, meaning the government has taken no action to make sure those tax receipts were paid.”

“It’s not that the fiscal terms are unduly liked, but what’s on statute doesn’t seem to be implemented, which is the problem,” says Ampofo.

The shortfall in oil revenues is a problem across Africa due to potential tax loopholes and a limited capacity on the part of revenue authorities to collect what is owed. Along with other African countries, Ghana can do a lot of work to close loopholes and empower revenue authorities to collect payments.

Altenkirch said she would prefer to see a concrete fiscal consolidation plan.

“We’ll have to track very closely the deficit reduction targets they set for themselves. Firstly, we will be looking to see how they are able to stick to their own deficit reduction targets,” she said. “Secondly, we will be looking at what measures they put in place to improve expenditure ... control, so we would like to see measures put in place where the government is able to better track expenditure. They will also need to ensure they manage their finances better to avoid a build of arrears to the extent they have in the past.”

Credit outlook 2013

A positive credit rating action will therefore hinge on the outcome of the upcoming budget in March. The government must look towards savings in public expenditure and the optimization of revenue collection streams in the oil and mining sectors.

This is not the first time Ghana has come out of an election year facing serious challenges. Last time around, in 2009, the government was able to implement some stringent consolidation measures to keep its finances in control.

Analysts expect that the boost in oil revenues from rising oil production, which began on the country’s Jubilee oil field in 2010, should help alleviate the country’s high fiscal burden.

The government will therefore, need to take a pro-active approach in optimizing revenue streams from the natural resource sector, whilst simultaneously closing tax loopholes if it wishes to achieve a debt sustainability.

This article was originally published by Euromoney Country Risk. To find out more: register for a free trial at Euromoney Country Risk.