The 2016 elections estimated expenditure and investments into the power sector are the two main threats to economic stability gained over the last few years.
This is according to Ratings agency Moody’s, in its report on the 2016 budget. The prediction backs historical fears that Ghana’s election cycle could derail progress made in stabilizing the economy.
In a statement released, Thursday, the agency is predicting that partly on the basis of these fears government’s target of reducing the deficit from 7.3% in 2015 to 5.3% will even not be met.
Moody’s which has already rated Ghana’s credit worthiness as extremely bad at B3 negative, says government is expected to spend more than 30% of revenues in 2015 on servicing debts and this is a major constraint on Ghana’s credit profile.
But the report expressed satisfaction that government has exceeded its revenue generation targets in 2015.
It is also hopeful that the expected oil revenue from commercial production in the TEN fields will boost economic growth in 2016.
Full statement
Ghana’s Prudent Fiscal and Monetary Policy Stance Is Credit Positive
Last Friday, Ghana’s (B3 negative) Finance Minister Seth Terkper presented the 2016 budget, which aims to reduce the fiscal deficit to 5.3% of GDP in 2016 from the targeted 7.3% in 2015 and the 10.2% deficit in 2014.
Then, on Monday, the central bank further tightened monetary policy to suppress inflation and anchor inflation expectations.
Although downside risks persist, proactive policy adjustments should help to preserve macroeconomic stability and support sovereign credit quality, a credit positive.
The comparison of fiscal results over the first nine months of the year with the budget targets and with 2014 budget execution data over the same period shows outperformance in particular on the revenue side: revenues and grants to GDP were 17.0% of GDP as of September 2015 as compared to the 16.3% target in the revised budget and in contrast to 15.6% over the same period last year.
Total expenditures and arrears clearance at 22.1% of GDP was broadly in line with the target and with last year’s performance, whereas the fiscal deficit registered 5.1% of GDP over the first nine months this year against a deficit target of 5.7% of GDP and the 6.4% of GDP deficit recorded over the same period last year.
Ghana’s fiscal deficit targets of 7.3% of GDP and 5.3% for 2015 and 2016, respectively, compare to our expectation of a more muted fiscal deficit reduction of 8.0% in 2015 and 7.5% in 2016.
Despite the better-than-expected performance, risks to the fiscal consolidation path for the rest of this year and for 2016 remain.
Some of the risks relate to the front-loaded investment expenditures required to address the power crisis in order to meet the 2016 growth target of 5.4% underlying the 2016 budget.
Election-related expenditures in 2016 are also a risk because they have contributed to past expenditure overruns.
However, we expect the constraints imposed by the three-year International Monetary Fund (IMF) program adopted in April 2015 to help prevent a renewed sharp increase in wage-related expenditures as occurred in 2012.
Ghana’s fiscal consolidation effort is accompanied by a tighter monetary policy stance with a view to anchoring inflation expectations and stabilizing the exchange rate.
On 16 November, the Bank of Ghana further increased the policy rate to 26% – one of the highest policy rates in the world – from 25% in September, citing significant deferred utility tariff hikes expected later this year, in addition to worsening external financial conditions.
The monetary policy transmission mechanism is likely hampered at such high interest rates so that one percentage more may not significantly alter inflation expectations, especially in view of a significant utility tariff increase.
Interest expenditures are already projected to exceed 30% of revenues in 2015 in the revised budget and are one of the major constraints on debt affordability and on Ghana’s credit profile.
In our view, the reduction and eventual elimination in deficit monetization targeted under the IMF program is more significant for signaling purposes.
Higher Eurobond risk premiums and reduced foreign investor participation in the domestic debt market are manifestations of worsening external financial conditions.
Higher domestic interest rates in Ghana counterbalance exchange rate depreciation pressures also stemming from deteriorating terms of trade and large external imbalances, which over the past two years have contributed significantly to increasing the government’s external debt to GDP ratio to 44% of GDP as of June 2015 from 39.3% at year-end 2014 and 27.2% at year-end 2013.
The risks to our revised growth outlook of 5.8% in 2016 are to the downside owing to the economic headwinds from credit constraints and declining purchasing power from utility tariff hikes.
However, we expect GDP growth to receive a boost from the TEN oil field production, on schedule to start in the second half of 2016.
