Moody’s upgrades Ghana’s economy to B3
Ghana's economy has earned praise from the rating agency, Moody’s, with a B3 rating, changing the outlook from negative to stable.
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The move is expected to boost investor confidence in the economy, which has suffered some major setbacks since the government began implementing its home-grown and IMF policies to correct some major imbalances.
Moody's had rated Ghana at B3/Negative since 2015.
The rating agency, in a statement, explained that three key drivers informed the decision to revise the outlook.
The first is the "significant deficit reduction and institutional reform implementation over the past year under the umbrella of the three-year IMF programme which started in April 2015".
"Reduced government liquidity risk on the external side after the successful issuance of a recent $750 million Eurobond in earmarked to redeem the remaining $400 million October 2017 Eurobond maturity" was the second driver.
The agency explained that the third reason was the improved balance of payment dynamics, amid continued development of oil and gas resources through higher foreign direct investment inflow, supporting reserve buffers and reduced currency volatility.
The Technical Advisor to the Ministry of Finance, Dr Sam Mensah, told the Daily Graphic in an interview that “the revision of the outlook at this time is a testimony to the prudent policies adopted by the government since 2014 via the home-grown programme and consolidated in the IMF programme”.
He said that positive action had come at a time when there had been an improvement in macroeconomic and fiscal indicators and followed the recent successful Eurobond issuance of US$750 million, priced competitively at 9.25 per cent in September 2016.
“This issuance marked the Eurobond from sub-Saharan Africa (ex RSA) in 2016 and demonstrates confidence from the global investor community in the consolidation of Ghana’s turnaround story,” he said.
In its report, Moody’s highlighted Ghana’s ongoing fiscal consolidation and strong fiscal discipline as credit positives.
Commitment to that level of prudence was recently codified into law via the Public Financial Management Law (PFML).
Moody’s also praised Ghana’s prudent debt management strategy, including the decision to utilise proceeds from the recent Eurobond to redeem upcoming external debt maturities, reducing rollover risks.
The stable outlook reflected Moody’s view that the reforms adopted by the government would remain in place and continue to deliver improved economic performance over the 12 to 18 months.
Together with the successful bond issuance, the rating action demonstrates the increasing confidence of international market stakeholders in Ghana’s turnaround story.
Rationale for stable outlook
The first driver for the assignment of a stable outlook is the significant reduction in the fiscal deficit achieved under the umbrella of the three-year Extended Credit Facility (ECF) programme since inception in April 2015, with a deficit reduction to 6.3 per cent of gross domestic product (GDP) in 2015, from 10.2 per cent in 2014.
The improvement is underpinned by both improved revenue collection and expenditure control, in particular with respect to wages and salaries, and includes the repayment of arrears in the amount of 2.4 per cent of GDP.
Budget execution data over the first five months of 2016 pointed to a tax and oil-related revenue shortfall exacerbated by temporary production interruptions at the Jubilee oil field, but which was mostly offset by capital expenditure cuts, with no salary or goods expenditure overruns.
The second driver of the assignment of a stable outlook is improved government liquidity risk profile after the recent issuance of the US$750 million six-year Eurobond at 9.25 per cent earmarked for the redemption of the remaining US$400 million outstanding of the 8.5 per cent October 2017 maturity.
After that, the next international bond principal payment of US$250 million is scheduled for 2020, indicating lower near-term external liquidity pressure. That said, gross borrowing requirements remain elevated in 2017 at about 18 per cent of GDP, amid tight domestic and external funding conditions.
The third driver stems from improved balance of payment dynamics recorded in the first half of 2016. Moody’s expects the US$750 million Eurobond proceeds, in addition to the COCOBOD loan in the amount of US$1.8 billion, to provide an increased foreign exchange buffer to better withstand external shocks such as renewed deterioration in the terms of trade or increased international capital market volatility following the anticipated tightening of US monetary policy.
Moody’s expects that Ghana’s fiscal and external accounts will also benefit from FDI inflows and the ramp up in oil exports from the Tweneboa, Enyera and Ntomme (TEN) oil field starting August 2016 towards 80,000bpd at full capacity and from the new Sankofa field with 30,000bdp starting production in the second quarter of 2017 before first gas is expected in the second quarter of 2018.
Government reacts
Shedding more light on the new economic status, Dr Mensah said the immediate impact was that it would bring the country’s yields down on the international market.
“As of this morning, all of Ghana’s yields were coming down, which means that should the government intend borrowing on the international market, the coupon rate will attract lower interest than what it did the last time it hit the international Eurobond market,” he said..
According to him, the new status was something “we should be happy about. It is not only for the government but the private sector as well”.
For instance, he said, when the private sector “is borrowing internationally, the lenders look at the government cost and use that as a benchmark. So the general cost of Ghanaian institutions accessing the markets will go down with this new rating”.
On whether the other rating agencies would follow suit, he expressed optimism, saying, “Normally they tend to move in tandem and so we expect something like that. Fitch has a negative outlook on Ghana and so we expect that to change soon.”
