BMI View: Macroeconomic stability is under threat in Ghana, due to the twin deficits on the fiscal account and current account. The government will seek some form of external assistance, the most likely option being limited technical assistance from the IMF.
There is growing speculation that Ghana may need some form of financial bailout, given various macroeconomic challenges. First and foremost, the budget deficit remains wide and the government debt burden is rising. At the same time, the current account deficit is also gaping, foreign reserves are low, inflation is increasing (14.5% in March 2014) and the local currency has plummeted by almost 15% year-to-date.
The authorities have responded with emergency measures including new foreign exchange laws and a 200 basis point interest rate hike in early February 2014, followed up with an increase in the cash reserve requirement for banks to 11% from 9% in early April 2014. Yet, the cedi has continued to plumb new lows, indicating weak confidence in the currency both domestically and abroad.
Gaping Budget Deficit Despite Tough Measures
Focusing first on the budget, provisional data indicate that the fiscal deficit stood at 10.1% of GDP in 2013 (using the Ghana Statistical Service's most recent estimate of nominal GDP). This was an improvement on the 11.5% deficit registered in 2012, but was significantly above the finance ministry's target of 9%. This occurred despite the tough measures enacted last year. Fuel subsidies were removed in May 2013 and in October 2013 the Public Utilities Regulatory Commission hiked power prices by 79% and water prices by 52%.
| Spending Pressures Have Crept Up |
|Ghana - Fiscal Expenditure by Category, % of GDP|
The wide deficit was the result of relatively sluggish growth in revenues and rapid growth in spending. As regards the latter, public sector pay has climbed swiftly and interest payments have risen as the debt burden has grown over recent years. By way of illustration, in 2013, the public sector wage bill equaled 9.9% of GDP, up from 6.8% in 2009, and interest payments equaled 4.7% of GDP in 2013, up from 2.8% in 2009. Expenditure in 2013 was further enlarged by expenses associated with the opposition New Patriotic Party's legal challenge of the December 2012 election results.
Although the court battle was a one-off occurrence that will not be repeated in 2014, other areas of expenditure will continue to weigh on the budget balance. The finance ministry intends to have a moratorium on public sector pay increases, which will be challenging given increasing industrial action and high inflation. Interest payments will also rise as the debt burden increases, as outlined below.
On the revenue side of the equation, we hold a cautious outlook, expecting slowing economic activity to result in decelerating growth in revenues. Anecdotally, cedi weakness and associated high inflation are sapping consumer demand and investor appetite is souring due to growing concerns about macroeconomic stability.
Incidentally, oil revenues will help matters, but they will not be sufficient to meaningfully improve the budget balance. In 2013, revenues from royalties, corporate tax and dividends, interest and profits associated with oil totaled GHS1,633mn (USD790mn) and comprised 8.5% of total revenues and grants. We forecast that revenues will increase over the coming years as oil output is ramped up, but we expect the contribution to total revenues to remain around 8-10% as the wider economy expands. Overall, we forecast that the finance ministry will miss its budget target again this year: the target is a deficit of 8.5% of GDP; we project 9.7% of GDP.
Debt Levels Rising, At High Cost
Debt levels have increased sharply in recent years as the finance ministry has issued debt to fund the perennial budget deficit. In Q413, public domestic debt equaled 28.5% of GDP (up from 18.0% in Q410) and public external debt equaled 28.8% of GDP (up from 20.2% in Q410).
| A Growing Debt Burden |
|Ghana - Government Domestic And External Debt, % Of GDP|
The associated interest payments on domestic debt exert a major strain on the budget, given the high cost of finance across the yield curve; 91-day T-bills are currently yielding 24% and a three-year treasury issue in February 2014 attracted a yield of 23%. The finance ministry has been lengthening the maturities in a bid to reduce rollover risk. A further objective is to attract offshore flows, given that foreign investors are only permitted to buy treasuries with an original tenor of three or more years.
| Debt Maturities Extended |
|Ghana - Public Domestic Debt By Tenor, % of GDP|
External debt is much cheaper to finance, with yields on Ghana's USD2017 and USD2023 eurobonds currently standing at 7.6% and 9.0%, respectively. However, these yields are elevated, having spiked from 6.3% and 8.4% respectively, at the start of 2014 as investors demanded a higher risk premium amid increased macroeconomic instability. In March 2014, the finance ministry cancelled plans to issue a new USD1bn eurobond due to the increase in yields.
Other Macroeconomic Frailties
At the same time as the budget is being strained, the current account is under pressure, exacerbating investor concerns surrounding macroeconomic stability and putting downside pressure on the cedi. The deficit swelled to 14.5% of GDP in 2013 from 12.5% in 2012 and has increased markedly from 8.2% of GDP in 2010 due to a boom in consumer and capital goods imports. With investor sentiment deteriorating, foreign direct investment is likely to wane this year, putting further pressure on the balance of payments and the cedi. The Bank of Ghana has attempted to stem the currency losses with a sharp interest rate hike and new foreign exchange laws as mentioned above, but the cedi has continued to weaken.
Scenarios For External Assistance
Ghana's debt levels are not excessively high by global standards. For example, BMI data for 200 emerging markets indicate that public external debt at the end of 2013 equalled around 40% of GDP on average, versus 28.8% for Ghana. As regards public domestic debt, Ghana's debt load (28.5% of GDP at end-2013) appears benign next to those of Egypt (72.5% of GDP) and Pakistan (45.1% of GDP), for example.
Nevertheless, the situation is deteriorating as outlined above, and the authorities are reportedly considering different ways in which they can bring things under control and reassure bondholders (both domestic and international) that obligations will be met. Assistance could take many different forms, each with implications for fiscal policy and the financial markets. The most salient scenarios for the coming six months are as follows:
Government-led fiscal targets with limited IMF oversight (very likely): We believe that the government will seek to maintain control over fiscal and monetary policy and avoid being forced into structural economic reforms. However, some limited technical assistance from the IMF would likely be welcomed, particularly because this would reassure investors that the problems are being tackled and there will be some external oversight. Under this scenario, fiscal targets would be more closely adhered to and the election-related spending cycle would be dampened, at the very least.
Finance Minister Seth Terkper said in early April 2014 that the government will be discussing options with the IMF and World Bank. It is rumoured that the government will set its own short- and medium-term targets which are then vetted by the IMF. An announcement to this affect would be viewed positively by the market, but not seen as a 'game-changer' - hence, we would expect Ghana's eurobonds to show little reaction. The narrowing of the budget deficit would take place slowly, the currency would continue to depreciate and local debt yields would stay high.
Bilateral loan from an emerging market trade partner (likely): The authorities may secure a bilateral loan from another emerging market - most likely China, Brazil, South Africa or the United Arab Emirates which all have strengthening ties with Ghana and are rumoured to be amenable to extending a line of credit. This would be collateralised in some way - for example tied to exports of oil, cocoa or gold - enabling Ghana to transfer some of its high-cost, short-term debt to cheaper, long-term finance. Such an arrangement would allow the finance ministry to avoid the policy monitoring that would likely accompany IMF assistance.
This scenario would be viewed less favourably by the markets than the above-mentioned scenario involving a degree of technical assistance, but the market outcome would likely be similar, ie little reaction in the eurobond market. There would be higher debt and greater risks of fiscal slippage over the coming years, resulting in faster currency depreciation and higher local debt yields than in the previous scenario.
IMF provides insurance in the form of a credit line (unlikely): The IMF offers various 'standby' arrangements including an Extended Credit Facility and Standby Credit Facility. Under these measures, Ghana would commit to structural reforms but there would be some flexibility regarding the implementation and timing. Furthermore, the government would have the option to tap a line of credit on concessional terms if needed - for example to meet short-term financing obligations. Finance Minister Seth Terkper commented in March 2014 that 'the IMF remains a lender of last resort... if it becomes necessary, we'll fall on the fund'.
| External Obligations Limited |
|Ghana - USD Interest and Principal Payments Due, USDmn|
However, this scenario is unlikely given that the IMF will be focused on Ghana's external liabilities and the obligations that fall due in the next few years are fairly limited. In 2014, 2015 and 2016 Ghana owes just USD62mn, USD124mn and USD124mn respectively in interest payments. Moreover, the government will want to avoid the policy prescriptions and also the perception of a 'financial emergency'. Under this scenario, Ghana's eurobonds would likely sell off but the broader economy (including the budget balance and currency) would stabilise more quickly than under the other two scenarios above.
Fiscal Policy (Ghana 2010-2018)
| Country || Indicator || 2010 || 2011 || 2012 || 2013 || 2014f || 2015f || 2016f || 2017f || 2018f |
| Ghana || Revenue, % of GDP || 19.1 || 21.5 || 22.2 || 20.5 || 19.5 || 18.7 || 17.8 || 17.6 || 17.9 |
| Ghana || Fiscal expenditure, GHSbn || 11.5 || 13.4 || 20.9 || 28.6 || 32.7 || 35.8 || 44.3 || 48.7 || 55.8 |
| Ghana || Expenditure, % of GDP || 25.0 || 22.4 || 27.9 || 30.6 || 29.2 || 27.3 || 28.8 || 27.2 || 27.2 |
| Ghana || Current expenditure, GHSbn || 8.0 || 9.7 || 17.4 || 24.3 || 27.9 || 30.7 || 38.3 || 42.2 || 48.5 |
| Ghana || Current expenditure, % of total expenditure || 69.8 || 72.5 || 82.9 || 84.8 || 85.4 || 85.6 || 86.6 || 86.6 || 86.9 |
| Ghana || Current expenditure, % of GDP || 17.5 || 16.2 || 23.2 || 25.9 || 25.0 || 23.3 || 24.9 || 23.5 || 23.6 |
| Ghana || Capital expenditure, GHSbn || 3.2 || 3.7 || 3.6 || 4.3 || 4.8 || 5.2 || 5.9 || 6.5 || 7.3 |
| Ghana || Capital expenditure, % of total expenditure || 27.5 || 27.5 || 17.1 || 15.2 || 14.6 || 14.4 || 13.4 || 13.4 || 13.1 |
| Ghana || Capital expenditure, % of GDP || 6.9 || 6.1 || 4.8 || 4.7 || 4.3 || 3.9 || 3.9 || 3.6 || 3.6 |
| Ghana || Budget balance, GHSbn || -3.4 || -2.5 || -8.6 || -9.5 || -10.9 || -11.3 || -16.8 || -17.2 || -19.2 |
| Ghana || Budget balance, % of GDP || -7.4 || -4.1 || -11.5 || -10.1 || -9.7 || -8.6 || -10.9 || -9.6 || -9.3 |
| Ghana || Primary balance GHSbn || -2.0 || -0.9 || -6.2 || -5.1 || -6.3 || -6.5 || -11.8 || -11.8 || -13.6 |
| Ghana || Primary balance % of GDP || -4.3 || -1.4 || -8.3 || -5.4 || -5.6 || -4.9 || -7.6 || -6.6 || -6.6 |
| Ministry of Finance and Economic Planning/BMI |
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