Capital flows: Ghana rating actions show African currency risks
Fiscal slippage, less FDI and lower export prices make Ghana among most vulnerable; Eurobond access still cheap
Standard & Poor’s and Moody’s revised their outlook on Ghana from stable to negative in December, as pressures on it and some other African sovereigns continue to mount. This follows Fitch Ratings’ decision to downgrade Ghana and Zambia to single-B ratings in October, despite booming economies and foreign investor confidence on the continent.
"The negative outlook indicates at least a one-in-three possibility that we could lower the ratings on Ghana within the next 12 to 18 months, due to its weakening fiscal and external profile," S&P said.
Ghana’s GDP growth reached 15% in 2011, before a post-election drop in 2012 to 7.9%, according to IMF figures. GDP growth hit a similar level in 2013, while, according to the IMF, the current account deficit is heading towards 13% of GDP, thanks to lower gold and cocoa prices, coupled with fiscal pressures.
The changes in the ratings outlook in Ghana – which is now rated B by S&P and B1 by Moody’s – come as increased spending on public-sector wages and debt service payments, coupled with still relatively low levels of revenue collection, have offset the glow from a second Eurobond issued in August and new revenues from a nascent local oil industry.
"With Fed tapering beginning, investors will become more picky and are much more likely to scale back operations in somewhere like Ghana due to fiscal slippage," says Carmen Altenkirch, director of sovereign ratings at Fitch in London. Ghana’s general government deficit swelled to 11.8% of GDP in 2012, more than double the 4.8% the government initially budgeted. The figure is likely to fall only slightly to 10.4% of GDP in 2013, according to S&P.
"Strong growth and the large fiscal deficit have translated into a significant current account deficit which the government has struggled to finance. And the currency has found itself under a lot of pressure since 2012," said David Cowan, Africa economist at Citi, in a report in late November.
Cowan’s report added: "In some ways, the deterioration in the fiscal story is very much the worst of all of deteriorating fiscal stories in sub-Saharan Africa over the last five years."
One of the other questions that arises in Africa is whether or not it will still be a good time for African governments to enter the Eurobond market, as the cost of funding begins to increase. Kenya is expected to issue its debut Eurobond in 2014 and there is also talk of Zambia returning to the market.
When Zambia and Ghana issued in the Eurobond market in 2012 and 2013 respectively, Zambia’s debut 10-year bond, issued on September 13 2012, was priced at 5.625%, while similarly rated Ghana’s second Eurobond on July 25 2013, for the same tenor as Zambia, priced at a yield of 7.9%.
Altenkirch at Fitch says that in historical terms, if one disregards currency weaknesses, "it is still a much better environment for African sovereigns to issue", even compared with pre-2008 days, when Ghana (in 2007) issued its debut Eurobond at 8.5%. But easy access to international bond funding today could be another challenge in years to come.
"In the event that Zambia can’t access the capital markets when its debut bond matures, they will have no option but to use around 22% of their reserves," says Altenkirch. "And if Zambia goes ahead with a second Eurobond issue, and if in that time market access does not improve, they would have to potentially utilize around 40% of their reserves in the space of 18 months."
Foreigners own around 26% of domestic debt in Ghana, says Altenkirch. One reason for greater reliance on such flows has been that large-scale projects, above all the Jubilee oil fields, no longer require large inflows of foreign direct investment.
"Now that the [Jubilee] development has more or less finished, FDI has taken a dip," says Alexandra Mousavizadeh, lead sovereign analyst for Ghana at Moody’s in London. "Where FDI covered 100% of the current account deficit, now it accounts for around 70%"
In December, Ghana’s central bank said it was implementing regulatory changes to ensure greater transparency in the local-currency market and, it is hoped, ease pressures on the cedi, by moving to uniform reporting of foreign exchange rates.
Mousavizadeh says Ghana’s foreign exchange reserves are low, at $5.2 billion: equivalent to only 2.9 months of import cover.
Further details on the new currency-market rules have yet to be announced, although an analyst at an Africa-focused bank says the move will do nothing to change the adverse dynamics of supply and demand for the cedi: "Foreign exchange reserves have not been able to grow in Ghana and this has been the case for the last three years. The current-account deficit remains under pressure and likely widened further in 2013."