As was expected by many economists and financial analysts, international sovereign credit ratings agency, Fitch has revised Ghana’s economic outlook downwards to B negative from B stable. The downward revision from stable to negative, although keeping Ghana’s B rating implies that the economy has been on a downward trajectory rather than its previous level standing.

Although Finance Ministry officials are publicly protesting downgrade, in private they admit that it was largely expected, being the inevitable consequent on government’s spending in 2020 to curb the spread of COVID 19 and ameliorate its economic effects on both businesses and households. Moody’s, one of the three international ratings agencies that track Ghana recently retained its rating at B with negative outlook and Fitch’s revision brings it in line. The third agency that rates Ghana, Standard & Poors, is expected to release its latest ratings over the next few months.
The revision of the outlook by Fitch to negative reflects the significant deterioration in public finances, stemming from the Covid-19 pandemic and the delays to the government’s fiscal consolidation efforts, which reduce Ghana’s ability to absorb further shocks for an extended period. This though was in line with government’s deliberate strategy of combating COVID 19’s spread and accompanying economic effects first and worrying about the inevitable effects on the state’s fiscal position later.

“Moreover, in our view, the lack of a clear majority in parliament following the December 2020 elections increases the risk of fiscal slippages”, Fitch pointed out. While this assertion is not fully clear it is being interpreted to mean that government will have difficulty in pushing through fiscal tightening policies as the Parliamentary minority will resist them for reasons of political posturing.

This recognizes that in Ghana, Parliamentary minorities tend to regard their primary task as making governance difficult for the executive by stalling or completely blocking policy initiatives and projects at the legislative stage especially when they are generally unpopular, despite being necessary; this with a view to making the opposition appear more sensitive to the economic plight of the populace than the ruling government. Therefore, for example, new revenue initiatives will be resisted by the minority in Parliament no matter how desperately needed they are for government to bridge its fiscal gap.

With the incumbent New Patriotic Party having only the slimmest majority in Parliament as currently constituted, it will therefore find it difficult to pass unpopular, but direly needed revenue enhancement measures and expenditure cuts.

While government attributes its sharply widened fiscal deficit for 2020 to COVID 19 related spending, its critics assert that a significant part of that spending – especially on social interventions – was in actual fact inspired by political exigencies ahead of last December’s general elections. Indeed, they point out that this is why, now that the elections have been won, government has reversed its fiscal stance tightening up to cut the deficit by tax increases despite COVID 19 still afflicting the populace with consequent socio-economic restrictions still hampering business and household incomes.

Instructively the International Monetary Fund has requested that government provide an audit of is COVID 19 related expenditure for 2020, a demand that government is not particularly enthused with but has little choice but to accede to since it had taken a US$1 billion Rapid Response Facility last year. While RRF facilities, being emergency response, are not tied to a plethora of policy conditionality like is usual with Fund financing, beneficiaries can be required to provide details of how the monies were used.

The ‘B’ rating reflects the high public debt level and low revenue base, which mean that Ghana’s debt affordability metrics will remain markedly weaker than rating peers over the rating horizon. This is balanced against Fitch’s expectation of a recovery in economic performance and a stabilization of debt/Gross Domestic Product and the ready availability of external and domestic financing.

“Public finances remain the key rating weakness for Ghana. After achieving a general government deficit on a commitment basis below 5% of GDP in the three years prior to 2020, the deficit widened to 11.5% of Gross Domestic Product following the approval of a mid-year supplementary budget that contained an additional 3% of GDP in Covid-19-related spending”, it further said.

“When arrears clearance and support for the financial and energy sectors is added, the cash deficit reached an estimated 14% of GDP. We forecast a significant fall in the cash deficit to 8.3% of GDP by 2022, but this remains well above the 2022 ‘B’ median of 4.8%. Post-pandemic recovery spending will keep government expenditure high compared with historical levels. We expect a recovery in government revenue, but note that Ghana has structurally low domestic revenue mobilization when compared with peers”, it added.

Debt to contribute to higher cash deficits

The ratings agency said Ghana continues to deal with the legacy of domestic payment arrears built up prior to 2017 and from contingent liabilities in the energy sector, which will contribute to higher cash deficits in 2021 and beyond. Ghana announces its fiscal deficits on cash basis which tends to hide payment arrears build ups until there is a change of government at which time the incoming political party announces the much larger deficit, as measured on commitment basis and declares that the outgone administration had been deliberately hiding the real size of the deficit.

Ironically though, for political gain, every incumbent administration readily announces pay downs of arrears inherited from its predecessors, claiming it as a primary constraint on its current expenditure for development programmes and projects.

“The full size of unmatched liabilities in the energy sector is unknown, but we estimate the current stock at $3 billion to $4 billion (2% to 3% of 2021 GDP). Furthermore, the sector continues to build new arrears owing to uneconomical tariff structures and take-or-pay contracts with power producers, although the government is renegotiating these contracts”, it explained

“Public sector debt/GDP is likely to plateau over the medium term, but Fitch said Ghana’s debt metrics will remain weak relative to ‘B’ peer medians. We forecast general government debt to reach 81% of GDP in 2021, including 2.5% of GDP in bonds held through the Energy Sector Levy Act Plc., which is excluded by the government.”

This is another area of controversy between government and international institutions that assess its performance and financial circumstances. Government excludes the value of the bonds issued by ESLA Plc on the basis that it is a Special Purpose Vehicle corporation as different from government itself; and perhaps more importantly, its debt is financed in the form of public taxes and revenues. As such therefore the debt is separated from government’s normal balance sheet.

However, Fitch tends to take the stance of the IMF that since ESLA Plc is government owned and kits bonds are underwritten by the state through government guarantees, the debt issued in the form of ESLA bonds are still effectively public debt.

It is not clear how Fitch classifies the financial sector reform related debt, issued in the form of “Resolution Bonds.” Although government accepts this nearly GHc20 billion in such bonds as part of the public debt it refuses to include it in its fiscal deficit on the grounds that the financial sector clean up bill is outside its normal operations, being a one-off policy initiative. Opponents of this stand, led by the IMF however insist that while it may have been a one-off initiative when first introduced in 2017, four years later it has kept growing bigger rather than smaller and so cannot be classifies as a one-off item any longer.

Besides, they point out, this debt has to be financed just like the normal items in the fiscal deficit and so excluding it only serves to under estimate government’s fiscal deficit financing needs.

What is clear though is that Fitch is taken a more pessimistic view of Ghana’s public debt trajectory than even the World Bank’s startling projection, announced earlier this year that the country’s public debt to GDP ratio will reach 85 percent by 2024.

But here again, the parameters used for the computations can significantly influence the results. Both the World Bank and Fitch have based their computations on current GDP levels where as government uses projections for end of the year, which incorporate targeted GDP growth for the current year and thereby reduce the denominator used in the computations significantly. Indeed, this is why government’s own public debt to GDP ratio has been lowered to barely 72 percent – from 76 percent hitherto – since it announced a projected GDP growth of five percent for 2021.

Ghana government debt now constitutes 535% of government revenue, compared with the 2020 ‘B’ median of 304%. Furthermore, an increase in domestic debt issuance has raised the government’s interest spending.

Fitch therefore forecasts interest expenditure to rise to 53% of revenue in 2021 before falling below 50% in 2022, compared with a 2022 ‘B’ median of 13.2%.

Ghana’s GDP to remain positive

Ghana’s GDP growth slowed sharply in 2020 to 0.4%, but Fitch noted that the country was one of few sovereigns globally to record positive growth.

At 4.9%. Ghana’s five-year growth average over 2016 to 2020 was higher than the ‘B’ median of 4.5%.

“We forecast a recovery to 5% growth in 2021 and 2022, as base effects help growth in the industrial and service sectors. The agricultural sector saw strong growth through 2020 and we expect this to continue, supporting Ghana’s overall recovery”, it asserted

Here it is in agreement with government for 2021 at least, with regards to expected economic growth. However, growth for the first quarter of 2021 was disappointing at 3.1 percent, down from 3;3 percent for the last quarter of 2020.

Nevertheless, it confirms that the economic recession that Ghana descended into during the second and third quarters of last year are now just a memory and even at current growth rates Ghana is set to better the average for sub Saharan Africa as a whole.

Indeed, it is the comparisons with other emerging market economies, both in Africa and on other continents, that should provide solace for Ghana. The country is far from alone in its COVID 19 instigated economic difficulties; although its public debt to GDP ratio is still above the average for middle income countries, that average also increased significantly last year to about 67 percent. Added to the fact that there is a consensus that Ghana will grow faster than the average middle income country over the next three years, this means the country is still a relatively good bet for international lenders and bond investors.

Besides this Ghana has been smart in doing the 2021 edition of its annual Eurobond issuances early enough to complete its transaction before Fitch announced its downgrade, which effectively warns that its economic circumstances are more likely to worsen this year than improve, especially with regards to its debt situation. Having taken US$3 billion off the international capital market already this year, the external segment of its deficit financing for the year is more or less completed already.

If it had waited, Fitch’s latest assessment could conceivably have convinced international bond investors to insist on higher coupon rates than they did in March. Considering that the rates demanded were high enough to persuade government to accept only US$3 billion of the US$6 billion it was offered, rather than the US$5 billion it had originally targeted, higher demanded coupon rates at the time of issuance would have proved very problematic for Ghana’s financial managers. Now Ghana has close to a year to show the international financial and investment communities that it can narrow its inordinate fiscal deficit and significantly slow the rate of