Caught in election cross-currents?
Latest report by the ratings agency, Fitch, on the Ghanaian economy is not interesting reading. The report, released last week, paints a gloomy picture of the economy, as the country gears up for the November 7 general elections- presidential and parliamentary.
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However, even though the report expressed scepticism about the performance of the Ghanaian economy in this election year, it still affirmed Ghana’s long-term foreign and local currency Issuer Default Ratings (IDR) at 'B' with a Negative Outlook.
In part, the report notes that “fiscal slippage ahead of the November elections would increase inflationary and financing pressures.
A further decline in commodity prices would negatively impact growth and exacerbate Ghana's twin deficits”, meaning, literally that, if we had any hope in an economic recovery, we may as yet, have to keep the champagne on ice!
Just last week, as it was also analysed in this column, the central bank showed faith in the progress the economy had made since the beginning of the year, maintaining the policy rate, at least for a few more weeks, if we should go by what Fitch is saying now.
The central bank’s claim of a rebound was premised on some headline indicators heading in the right direction- inflation, interest rates, exchange rate and most of the other macro-economic indicators are steadily strengthening (The Mirror, March 18 to 24 editions- Economy shows recovery signs).
Fitch’s recent review, therefore, seeks to contradict the view held by the economic managers, and whereas you wouldn’t necessarily expect all analysts to agree on the same viewpoint, the ratings agency’s view, still, is a bit far-fetched! Cautiously as it was finely crafted, it still needs some probing.
In fact, far-fetched because there are a number of claims made by Fitch which do not follow the policy stance and economic direction taken by the government and therefore cannot be wholly supported by hard facts.
For instance, claims that “The 2016 budget calls for a further narrowing of the deficit to 5.3 per cent of GDP. However, Fitch believes that the narrowing will be smaller and forecasts a 2016 fiscal deficit of 6.3 percent,” in part, is mainly speculative since there is no justifiable basis to prove that if the deficit can be narrowed to 6.3 per cent in the view of Fitch, it cannot achieve the target of 5.3 per cent set by the government.
Conjectures do happen in economics but when we create an “autistic science” out of it, it, indeed, becomes out of touch with reality!
As financial markets are moved by information — current information and expected factors — it is always necessary for the right information to be fed the market to ensure that asset classes really reflect their true value, and also build hope for an ultimate momentum that will make the economy grow.
For this reason, ratings agencies have had difficulties with some governments in the past. In fact, in the wake of the financial crises some few years back, ratings agencies were torn to shreds, as most liberal economists blamed the crises on their acts of commission, and of course, omission.
Take the case of most of the toxic assets carried on the books of most financial institutions at the peak of the crises, for example. Sub-prime loan contracts that were not worth the paper on which the loan agreements were signed were still highly rated by ratings agencies giving them tradable effects, and causing unsuspecting investors to go for them.
In the end, the effect, which is still very evident today as some global financial markets are still in the doldrums, has caused a rethink about the way financial markets should be allowed to behave.
And perhaps too, a rethink about the way we should treat reviews by ratings agencies. This approach, l believe, is shared by ratings agencies themselves. Defending their work in the heat of the sub-prime crises that had led to credit squeeze in financial markets, the agencies, more or less, entreated the public to see their views as “guide” and not necessarily as the gospel truth.
Therefore, using the latest work done by Fitch as a guide, and as a possible scenario of what could play out in Ghana this year, l would attempt, again, a possible reason why the Fitch’s assessment is different from what the economic managers think.
First off, African elections — parliamentary and presidential — always have some interesting waves on financial markets.
The undercurrents, which are always strong, are mostly caused by the ripples of over-spending in an election year by a ruling government, lack of financial discipline as the pressure mounts on government to fulfil promises of the past and overall fiscal challenges.
However, recognising these challenges and with an aim to ensure that things were done differently this year, the government has instituted policies to ensure that those cross-currents do not derail the economic gains so far made.
Fitch’s claim, perhaps, is that it would happen, nonetheless!
Yet, in Fitch’s view, there are some positives too, which probably, could be what caused them to maintain the country’s IDR. The report by the agency says the country’s progress on the fiscal front was commendable, especially with the fiscal deficit narrowed from 10.2 per cent in 2014 to the current estimated 7.2 per cent of GDP.
Again, Fitch's view on the local currency was positive, claiming that it would continue to stabilise this year, predicting that the wide swings of the previous years could be a thing of the past.
All in all, the sea change is telling. The broader assurance by the Monetary Policy Committee (MPC) of the Bank of Ghana that the economy was on the right footing by maintaining the monetary policy rate at 26 per cent after five rate hikes in 2015 should be the guide to the future of the Ghanaian economy.
Of course, we cannot say that the economic conditions would remain the same for the foreseeable future. Certainly not. But ceteris paribus (with other things being the same), we should be enjoying the rebound this year and beyond.
Again, when the facts change, l will change my mind too but for now, l partly share in the anecdotes by Fitch.
