Business News of 2014-06-17

We only lend to government - BoG tells Fitch

The Bank of Ghana (BoG) has confirmed that it financed the government’s entire budget deficit in the first quarter but admitted it was not desirable.
This according to the central bank was due to a shortfall in government revenue, which had pushed the bank to advance funds to the government to finance the deficit.
The Head of Financial Stability at the Bank of Ghana, Dr Benjamin Amoah, told the Graphic Business in a telephone interview that, “due to the shortfall in government revenue, all financing of the deficit came from the central bank.
Based on the central bank’s unpopular action, ratings agency, Fitch said on June 9 that the Bank of Ghana printing money to bridge the fiscal gap threatens to further fuel an inflation rate that’s at a four-year high.
Presently, the inflation rate for month of April stands at 14.70 and it is expected to rise further when the latest figure for May is released.
The BoG action is also predicted by Fitch to further weaken the local currency which has already plunged by some 23 per cent against the dollar this year.
Presently, the government is struggling to fund a shortfall that Fitch estimates will exceed 10 per cent of gross domestic product this year.
The rating agency is also warning that government would end the year spending more than what it has collected as revenue.
Fitch's latest report notes that the first quarter has already recorded a budget deficit of a little over 2.1 percent and that was financed by the Bank of Ghana.
The prediction is bad news for government as it battles to demonstrate to its development partners and the Britton Wood institutions that it is committed to carrying out an aggressive fiscal consolidation programme to check its rising debt.
But Dr Amoah in explaining the rationale for its action said, “The central bank is allowed to give a short-term advance to the government when there is a deficit.”
However, he said it would have been better if the government did not borrow from the central bank, admitting that the move was not a desirable one.
“We rather prefer government does not borrow from us since this could lead to a rise in inflation and put pressure on the cedi,” he said.
“The ideal and preferable situation would have been for the government to borrow from the commercial banking sector or external sources”, he said.
“There could be some inflationary impact but we have tools to mop up any excess liquidity,” she said. Inflation accelerated to 14.8 per cent in May from 14.7 per cent in the previous month, according to the Ghana Statistical Service.
The cedi has also dropped 0.6 per cent against the United States dollar to 3.105 as of 4:47pm on June 19.
It is estimated that the first-quarter's deficit of 2.1 per cent of GDP amounted to just over 2 billion cedis (US$644 million).
Dr Amoah, however, expects the government to remain within its budget-deficit target of 8.5 per cent of GDP this year.
Fitch paints a bleak picture
Fitch expects rising interest costs and weaker revenue growth on the back of rising macro-economic uncertainty to push the budget deficit over 10 per cent of GDP – the third consecutive year of double digit budget deficits and above the government’s target of 8.5 per cent.
This, combined with the steep depreciation of the cedi, will see debt jump again to 61 per cent of GDP by the end of 2014, from 58.2 per cent at end-2013.
Debt servicing costs have also risen steeply, to an estimated six per cent of GDP in 2014 from 3.3 per cent of GDP in 2011, adding to the intractable nature of Ghana’s fiscal position.
External financing conditions will remain extremely tight over the coming months. Foreigners held 21 per cent of domestic debt at end-2013, down from 26 per cent in 2012. Of this, roughly one quarter was due to mature by the end of this month.
With some recent auctions suggesting foreigners’ unwillingness to roll over existing debt, this could see a further outflow of funds adding to pressure on the cedi.
Further stress might arise from Ghanaian banks repaying dollar loans taken out during 2013, and there are potential risks of further dollar outflows if the BoG were unable to roll over swap facilities and loans. Gross external financing requirements, net of FDI, stand at roughly 70 per cent of reserves.
Reserves were US$ 4.7bn in March 2014, a fall of US$ 900 million over the quarter, and just 2.3 months of current external payments.
Fitch placed Ghana’s ‘B’ IDR on Negative Outlook in March 2014 highlighting deteriorating external and fiscal balances and noting the increasing challenge and cost of financing the deficit.
A further deterioration in external finances and an erosion of international reserves that jeopardised external financing capacity are ratings sensitivities.
Gov't rejects Fitch claims
However, Vice-President Kwesi Amissah-Arthur has rejected the recent assessment of Ghana’s economy by Fitch, saying the rating agency is just hitting hard.
According to the vice-president, “in this industry sometimes they have to hit hard for your message to go across, so they are making very dramatic statements.” “The reality may not be as they put out,” he said of the rating agencies.