Cedi fall rattles investors

Moody’s Investor Services has downgraded the country’s sovereign bond rating from B2 to B3 ahead of government plans to issue its third Eurobond in four years.

The downgrade is likely to further dampen investors’ faith in the perceived “risk-free” nature of government’s Treasury securities and make it a bit more expensive for Ghana to borrow, which doesn't help when the country is now faced with liquidity challenges and expects a sharp decline in revenue.

The primary driver weighing on Ghana's credit worthiness according to Moody’s is government’s deteriorating currency and debt trend, with the debt-to-GDP ratio jumping from 54.8% in 2013 to 67.2% at the end of 2014.

The credit rating agency has made three big points that government cannot simply bat away, at a time when it has projected a bleak revenue outlook and energy supply deficit has moved from bad to worse.

More specifically, Moody’s said: “The negative outlook reflects further downside risk to the country's debt dynamics and liquidity pressure in the short-term, if the country's policies fail to successfully contain its fiscal deficit, stabilise its currency and address current impediments to higher economic growth”.

As of now, the general economic outlook is not inspiring and impacts negatively on business confidence in the face of government’s plans to cut spending this year by about GH?1.5billion, plus the fact that the energy crisis which has rattled the confidence of businesses and consumers over the past three years seems far from over.

At the same time, the country’s currency, the cedi, has begun to lose ground to the major trading currencies -- deteriorating by about 2% against the US dollar since the year began.

Government’s hopes now rest on the IMF-board approval of the budgetary support programme expected in the second week of April, which Finance Minister Seth Terkper expects will give credibility to government’s home-grown fiscal consolidation policies.

Nonetheless, Moody’s is pessimistic about the IMF programme being a panacea for the country’s woes when the government’s appetite to pay more for loans seems unabated.

The Bank of Ghana earlier indicated that government plans to borrow GH?25.42billion from the domestic market within the first six months of the year, which is twice what the state borrowed at the same time in the previous period.

It added: “The main focus under the three-year IMF programme (recently agreed at staff level, pending IMF board approval expected in April) is fiscal consolidation via expenditure control and increased tax collection, building on the budgetary measures implemented in the 2015 budget.

“However, this fiscal consolidation effort will take place in the context of a slow growth environment which dampens revenue generation capacity. Ghana’s debt affordability is already among the weakest in Moody's rated universe, with annual interest payments amounting to about one-third of revenues in 2014.

“The growth slowdown is being exacerbated by a significant power shortage currently amounting to almost a third of peak demand. Moody’s expects a more muted fiscal consolidation path over the next two years than envisioned by government in view of significant investment needs to resolve the power crisis, in addition to the election cycle of 2016 which has historically coincided with expenditure over-runs.

“The second driver of the downgrade reflects increased government liquidity risk in view of large gross borrowing requirements amid more difficult domestic and external funding conditions. In particular, higher prevailing risk premia than in October 2014 during Ghana's most recent Eurobond issuance add to the challenges of returning to the international markets ahead of the US$530million Eurobond maturing in 2017, notwithstanding the establishment of a Sinking Fund aimed at assisting with future debt repayments.

“On the domestic side, large domestic rollover needs and a front-loaded issuance calendar have driven interest rates to over 26% in the short-term T-bill segment. The IMF programme also reduces the scope for central bank support in financing the current-year fiscal deficit.”