Ghana: Ghana's Economic Outlook Positive - Moody's

Ghanaian national flag (file photo).
27 January 2020

Rating firm, Moody's Investors Service has affirmed Ghana's long-term issuer and senior unsecured bond ratings at B3 and changed the outlook to positive from stable.

"Moody's has concurrently affirmed the rating of the bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) at B1," a statement issued last Friday by the rating firm in New York said.

The statement said the decision to assign a positive outlook reflected Moody's rising confidence that the country's institutions and policy settings would foster improved macroeconomic and fiscal stability over the medium term, in part as a consequence of the reforms implemented under the recent IMF reform programme.

Those reforms, according to Moody's, are beginning to bear fruit, as seen for example in the return to primary fiscal surpluses, measures to smooth the debt maturity profile and increasingly sustainable growth prospects.

The rating firm said pressures and risks remain, as evidenced by persistent revenue challenges, a potential repeat of pre-election fiscal cycles, and the emergence of significant arrears and further contingent liabilities in the energy sector, all contributing to rising public debt.

"The positive outlook reflects increasing confidence that the government will manage those pressures in such a way as to sustain and enhance external and fiscal stability.

"The decision to affirm the B3 rating balances, for now, those positive medium-term trends and existing challenges," it said.

Moody's said a key constraint on the rating was the country's significant exposure to international capital flow reversals, which tend to coincide with exchange rate volatility and rising external and domestic borrowing costs, putting pressure on already weak debt affordability.

"Measures which reduce that exposure by demonstrating reliable liquidity risk management and increasingly firm control over the debt position would support an upgrade to a B2 rating. However, those measures will take time to evidence impact," the statement said.

As a consequence, Moody's said the outlook was unlikely to be resolved quickly and might even extend beyond the usual 18-month period in order to monitor how policy unfolds following the forthcoming elections, and in particular government's progress in implementing its energy recovery strategy.

"Ghana's foreign-and local-currency bond and deposit ceilings remain unchanged, namely the foreign-currency bond ceiling at B1, the foreign-currency deposit ceiling at Caa1, and the local-currency bond and deposit ceilings at Ba3," the statement said.

Giving the rationale for the positive outlook, Moody's said for some time, Ghana's rating had been constrained by two related factors; first, by the challenges, its policymaking institutions had experienced in establishing a consistent set of policies which support macroeconomic and financial stability, and which survive changes of government.

Second, by the high level of external commercial debt holdings which, taken alongside limited net foreign exchange reserves, exposes government and the balance of payments to a loss of international investors' confidence in policymakers' ability to sustain economic and financial stability, raising the risk of a fiscal and/or balance of payments crisis, it said..

However, Moody's said in recent years, Ghana had seen a number of positive developments in key credit metrics, which partly reflected the institutional and fiscal reforms implemented under the four-year IMF programme that was completed in April 2019.

"These include a return to sustained economic growth at around five per cent on average, supported by the development of domestic hydrocarbon resources and the prospect of sustained non-oil growth driven by the restoration of power supply and renewed infrastructure investment, a structural improvement in the current account dynamics, and fiscal reforms which have resulted in primary surpluses since 2017.

"Key fiscal reforms include the Public Financial Management Act (2016) which improves fiscal governance and the Fiscal Responsibility Law (2018) requiring adherence to an overall fiscal deficit ceiling of five per cent of GDP and a primary surplus," the statement said.

According to Moody's, last year saw a cash deficit of 4.8 per cent of GDP and a primary surplus of 0.9 per cent of GDP -- weaker than the initial targets but within overall limits.

"Moody's expects a similar outcome this year and a renewed shift to fiscal consolidation following the election.

"Beyond the fiscal sphere, measures taken over the past couple of years to recapitalise the financial sector and to address the country's power deficit (albeit the latter with problematic unintended consequences) also suggest active, moderately effective policymaking and support rising confidence in policymakers' ability to sustain economic and financial stability and to limit the risk of external shocks in the coming years," the rating firm said.

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