Business News of 2013-12-03

The 2014 Budget: Fitch vrs Government

International rating agency, Fitch, and the government are poles apart on some fiscal targets announced in the 2014 budget.

While the agency believes fiscal policies announced in the budget will not “effectively address the deterioration in government finances, the Ministry of Finance thinks otherwise.

The debate was first instigated by Fitch, when it issued a statement headlined ‘Ghana Budget: Fiscal Aims Limited, Overshoots Still Likely.’

Acording to the rating agency, Ghana's 2014 budget aims for a very limited fiscal correction following slower-than-anticipated consolidation this year.

“We do not think it will effectively address the deterioration in government finances over the past two years that has substantially eroded Ghana's creditworthiness”, it said.

Fitch said the slower fiscal consolidation than the authorities had anticipated in the first nine months of 2013 and the consequent risk of fiscal slippage was a key driver of its downgrade of Ghana's sovereign rating to 'B' from 'B+' in October.

It also pointed out that 2014 budget targets a deficit of 8.5 per cent of GDP following an upward revision of the 2013 deficit to 10.2 per cent against a target of nine per cent at the time of the previous budget.

Among many other things, the rating agency said the budget also pushes back a year (until 2016) the target deficit of six per cent of GDP .

As a result “We maintain our view that the pace of fiscal consolidation over the next two years will be slower than the government projects, with Fitch forecasting a deficit slightly above nine per cent for 2014”.

This, Fitch said reflects a divergence in views on the government's capacity to significantly expand the revenue base as a percentage of GDP, given persistent shortfalls in revenue collections over the past two years.

The further build-up in arrears, it said highlighted continued challenges with public sector financial management despite commitments to substantially reform the system.

Successive years of large budget deficits have put pressure on public debt, which has risen to 52 per cent of GDP in September 2013 from 38.3 per cent in 2011 and 31 per cent of GDP at the time of the 2008 elections and above similarly rated countries ('B' median, 38.2 per cent of GDP).

Fitch forecasts that debt will rise to 54 per cent of GDP by the end of 2014.

Policy credibility has been significantly weakened following two years of larger-than-expected budget deficits.

Risks remain to the medium-term fiscal outlook, including persistently high bond yields and continued arrears build-up as well as utility subsidies.

In its rebatal, the ministry in a statement said “We disagree with Fitch Ratings’ position that the consolidation measures announced in the budget will not effectively address the Ghana fiscal challenges experienced in the past two years.

It insisted that “Fiscal policy as outlined in the 2014 Budget continues to aim at fiscal consolidation through improved revenue mobilisation, rationalisation of public expenditures, and review of financing methods”.

The ministry maintained the measures announced in the budget are credible to ensure that Ghana’s fiscal deficit is reduced to a sustainable level over the medium term adding that Ghana does not wish to adopt abrupt measures that will affect the medium term growth prospects of the economy.

The budget also outlines various debt management strategies aimed at ensuring debt sustainability.

It said although a fiscal deficit higher than what was estimated for 2013 is projected for the year, it is worth noting that significant progress has been made in addressing the issues that led to the fiscal slippage in 2012 as outlined in Paragraph 9 of the 2014 budget.

For example, corporate income tax from the petroleum sector, which registered a shortfall in 2012, is now showing a positive variance; petroleum and utility prices have been adjusted upwards to reduce the burden of subsidies on the budget and consultations have been held with development partners to ensure that grants are disbursed as planned.

As Fitch Rating rightly stated and already noted in the 2014 budget, the two areas that remain a challenge are wages and interest cost.

Addressing these two challenges must be viewed within a medium term perspective as structural measures are needed to correct them.

In this regard, the 2014 Budget outlines specific policy and administrative measures to bring the wage bill under control and to reduce the interest cost burden on the budget.

The major cause of the expected fiscal slippage in 2013 is the significant shortfall in non-oil tax revenue.

As indicated in the budget, the revenue shortfall is attributed to the decline in the volume of imports and the slowdown in economic activity during the first half of the year as a result of the year-long energy crises that affected industry and some services. This also affected growth.

In addition, falling gold and cocoa prices on the world market affected the profits of companies, particularly the mining companies, resulting in significant shortfalls in corporate income taxes.

We do not anticipate such constraints in 2014, at least, not in the magnitude of what occurred in 2013.

More specifically, paragraph 957 of the 2014 Budget outlines specific debt management strategies to ensure debt sustainability and efficiency in debt management.

We wish to note that the publication by Fitch focuses on headline numbers without commenting on the policies outlined in the budget to achieve our macroeconomic objectives.

Both arguements raised may be cogent depending on where one stands.

However, there is the need for the government to ensure that whatever measures it has outlined to address the defects in the economy are cogently followed to address the imballances.

What the government needs to understand it that, Fitch and other rating agencies will come at it again should it fail to tackle the issues outlined in the budget because it would not be the first time governments have failed to go by measures announced in budgets.