Fitch, others ratings on Ghana’s economy

BY: Larweh Therson-Cofie

International credit rating agencies have, within the past two weeks, subjected Ghana’s economy to close analysis. The Standard Chartered Bank International also issued a statement on the performance of the economy.

The credit rating agencies and the bank also made short and medium term projections on the economy of Ghana.

Fitch Ratings Limited, in a statement released on March 28, reduced Ghana’s economic outlook form “stable” to “negative.”

Fitch decided to maintain Ghana’s economic rating at “B” but warned that it would be compelled to lower the country’s rating if measures were not taken to improve economic performance in certain areas, especially the rising debt burden and depreciation of the cedi.

According to Fitch, a number of key factors were used to assess the country’s economic performance in the period under review.

The factors include the worsening fiscal position, revenue under performance and the intractable expenditure on wages and interest and the rising debt burden.

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Those shortcomings have caused budget deficit of 10.8 per cent of Gross Domestic Product (GDP) in 2013, 20 per cent depreciation of the cedi and government debt to rise from 48.9 per cent in 2012 to 61.89 per cent of GDP in 2013.

Ghana has two years of double digit and larger than expected budget deficit, Fitch said.

“Ghana’s large budget deficit is adversely impacting economic stability with the current account deficit and inflation firmly in double digits,” Fitch added.

The inflation figures for January, 2014 was 13.8 per cent.

According to projections made by Fitch, the government was not in a position to increase revenue significantly, therefore, it expected efforts to improve fiscal conditions to be slower than planned.

“Reducing arrears and current expenditure remains a challenge,” Fitch added. Fitch expected inflation to be at 15 per cent in 2014.

The rating agency foresees weaker growth prospects for the country in the next two years.

It puts Ghana’s GDP growth rate for the period, 2013 to 2015, at 5.7 per cent, adding that high domestic interest rates, economic vulnerabilities and power-supply problems will affect growth.

The agency stated that it doubted if Ghana could pay its debts in future.

Ghana’s political stability exemplified by good governance record and democratic history, especially the peaceful transfer of power, rule of law and the independence of the Judiciary – were other factors that influenced Fitch’s assessment of the economy.

The statement warned, however, that it would downgrade the economy if external reserves continued to drop, fiscal accounts and debt burden worsened and if economic performance and economic stability failed to improve.

Another credit rating agency, J.P. Morgan, a leading investment banking institution, also predicted a gloomy outlook for the economy.

The agency predicted a possible further 20 per cent depreciation of the cedi in 2014 due to low external reserves and rising inflation.

Lack of indications of “a real turn-around in the country’s fiscal situations”, according to J.P. Morgan, contributes to the woes of the national currency.

The Standard Chartered Bank International, in its assessment, also painted a no-rosy picture of the economy.

In a statement, the bank predicted what is described as a great financial distress in a short term because of the high debt burden on the economy.

Ghana’s economic growth rate was 5.5 per cent in 2013. It was close to 8.0 per cent in 2012.

Dr Mahamudu Bawumia, former Deputy Governor of the Bank of Ghana and running mate of Nana Akufo-Addo in the 2012 Presidential elections, has, in a lecture, estimated that Ghana’s debts  increased by  400 per cent in five years and that the country spent 40 per cent of national revenue to service the debts.

Bank of Ghana puts Ghana’s debts at 53.5 per cent of GDP in 2013

In a sharp response to Fitch Ratings’ assessment of Ghana’s economy, Dr Henry Kofi Wampah, Governor of the Bank of Ghana, played down the predicted gloomy prospects for the economy. 

He said the rating was shallow and did not reflect the true outlook of the economy, adding that Fitch based its assessment on short-term effects of present economic conditions on the economy.

Dr Wampah added that the short and medium terms held good prospects for the economy.

“They didn’t look as much to the forecast both in medium and long term in my view. I think they should have put some weight on the long term. They were more focused on the short-term view and so I cannot agree with them.”

Should Ghanaians be bothered about what the international rating agencies say about the economy? 

Why are the agencies concerned about the economy of nations of the world?

Although they are human institutions and that they may not be 100 per cent accurate, the rating agencies are credible and recognised international institutions. They are independent and impartial organisations.

A credit rating institution is defined as “a company that assigns credit ratings – ratings of the debtor’s ability to pay back the debt by making timely interest payment and of the likelihood of default.

“An agency may”, according to the definition, “rate the creditworthiness of issuers of debt obligations, debt instruments, and/or in some cases, the servicers of the underlining debt, but not in individual consumers.

“The credit rating affects the interest rates a security pays out, with higher ratings leading to lower interest rates.”

There are three top credit rating agencies.  They are: Moody’s, Standard and Poor and Fitch Ratings Limited.

The three are said to control about 95 per cent of the world’s rating business.

Meanwhile, the Minister of Finance, Mr Seth Terkper, last week told parliament that the government had lined up measures to confront the challenges facing the economy.

The measures include a moratorium on loans and contract awards; a freeze on public wage increase and a redeployment exercise in the public service.

 The Finance Minister added that “there would also be the rationalisation of the wage bill, pensions, gratuities and social security payments as part of measures to reduce the wage bill to tax- revenue ratio to the ECOWAS threshold”.                                                                                                          

The Bank of Ghana puts the public wage bill at almost 64 per cent of total tax revenue for 2013. The ECOWAS threshold is 35 per cent of total tax revenue.                                                               


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