September 29, 2016 / 4:26 PM / a year ago

Fitch Affirms Ghana at 'B'; Outlook Negative

(The following statement was released by the rating agency) HONG KONG, September 29 (Fitch) Fitch Ratings has affirmed Ghana's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B' with Negative Outlooks. The issue ratings on Ghana's senior unsecured foreign and local-currency bonds have also been affirmed at 'B'. The rating on Ghana's USD1bn partially guaranteed note has been affirmed at 'BB-'. Ghana's Country Ceiling and Short-Term Foreign and Local Currency IDRs have been affirmed at 'B'. KEY RATING DRIVERS The ratings and Outlook reflect the following factors: Ghana is making good progress in fiscal consolidation and macroeconomic stabilisation under its IMF programme, but substantial downside risks remain. General government debt was high at 72% of GDP at end-2015, well above the 'B' median of 54%. Debt/GDP has increased rapidly from 47% at end-2012 debt, reflecting persistent budget deficits and exchange rate depreciation (64% of debt is denominated in foreign currency), but Fitch forecasts it to decline slightly to 69% at end-2016. Fitch forecasts the general government deficit to narrow to 5% of GDP in 2016, below the original budget target of 5.3%. This represents significant fiscal consolidation from a deficit of 6.3% in 2015 and 10.2% in 2014. The adjustment has been even stronger in accrual terms as the government has been paying down its stock of arrears. However, Ghana's presidential and parliamentary elections, scheduled for 7 December 2016, represent a downside risk in view of the last elections in 2012 when the fiscal deficit widened to 11.6% of GDP from 4.1% in 2011 and the government ran up substantial payment arrears. Ghana's USD915m extended credit facility with the IMF is a key support for the ratings, as it allows the country access to external financing at concessional rates and provides an anchor for policy discipline. A second review of the programme was concluded in May and the third review is underway. However, the third review was delayed owing to the Fund's concerns about outstanding SOE debt and a law passed by Ghana's Parliament allowing central bank financing of the government up to 5% of the previous year's revenues. Ghana's current account deficit will narrow to 6.7% of GDP in 2016, after averaging 10.1% over the years 2011-15, but still remains above the 'B' median of 5.8%. Fitch expects that the new oil and gas production and higher commodity prices will improve export performance in the coming years, but Ghana's fuel imports, for power generation, will keep upward pressure on imports. The improving current account, along with disbursements from the IMF and a USD750m Eurobond, have helped Ghana's reserves position, which will increase to USD4.8bn, or 2.6 months of current external payments, by end-2016. Ghana's gross external public debt stock will be USD19bn at end-2016 and at 43% of GDP net external debt will be significantly higher than 'B' rated peers (21%). Growth will pick up slightly in 2016 to 4.1% according to Fitch's forecasts, from 3.9% in 2015. This represents a downward revision to the agency's previous growth forecast, owing to electricity shortages through to July and technical problems at Ghana's Jubilee oil field. Fitch forecasts growth to strengthen to 6.3% in 2017 and 7% in 2018, supported by gains from macroeconomic stabilisation and the coming online of additional oil and gas production at the TEN and SGN fields. Robust growth potential is an important rating strength. Consumer price inflation has remained high so far in 2016, and was 16.9% in August. Inflation will likely moderate but will fall to the Bank of Ghana's inflation target range of 8%/-2% only in 2018. Disinflation will be aided by the effects of tight monetary policy, FX stability, and tax and energy tariff changes falling out of the 12-month calculation. A decline in inflation should allow the Bank of Ghana to start to ease its policy rate, which still stands at 26%, and this should facilitate a decline in government borrowing costs in the domestic market. State-owned energy companies have reached an agreement to restructure around USD1.3bn (3% of GDP) of debt they owe to the Ghanaian banking sector, which Fitch views as a contingent liability to the sovereign. The SOE non-payments (along with cedi depreciation and the slowdown in growth) were the main cause of a sharp rise in the NPL ratio to 19.3% of loans in May 2016 from 14.7% at end-2015. Deteriorating asset quality remains a risk to Ghanaian banks, but overall, the sector remains liquid and well-capitalised. Ghana scores a '3' on Fitch's macro prudential indicator, reflecting rapid growth in credit between 2011 and 2014. Ghana has had a history of largely free, fair and peaceful elections since the end of military rule in 1992. However, opinion polls suggest it will be a close contest between the ruling National Democratic Congress and the New Patriotic Party, increasing the tail risk of dispute. Fitch does not expect a major change in economic policy after the elections as both parties have supported the economic adjustment programme under the IMF. The ratings are supported by World Bank governance and business environment indicators that are stronger than the 'B' median. However, the ratings are constrained by low GDP per capita, which at USD1,549 is less than half the 'B' median, low human development indicators and dependence on commodity exports. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Ghana a score equivalent to a rating of 'B' on the Long-Term Foreign Currency IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign Currency IDR Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year-centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger negative rating action include: - Failure to narrow the budget deficit and stabilise government debt/GDP. - Failure to stabilise international reserves. - Failure to improve macroeconomic stability, in particular to control inflation. The Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: - Continued progress on fiscal consolidation that is consistent with debt declining over the forecast period. - An improvement in Ghana's external position that includes a narrowing of the current account deficit and the rebuilding of the external reserves position. - An improvement in macroeconomic stability. KEY ASSUMPTIONS Fitch assumes that Ghana's oil production increases as new fields come on stream over 2016H2-2018. Fitch assumes Brent oil prices will average USD42/barrel in 2016, USD45/b in 2017, and USD55/b in 2018. Fitch assumes an IMF programme remains in place through the 2016 elections. Contact: Primary Analyst Jermaine Leonard Director +852 2263 9830 Fitch (Hong Kong) Limited 68 Des Vouex Road Central Hong Kong Secondary Analyst Ed Parker Managing Director +44 20 3530 1176 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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