Fitch affirms Ghana at 'B' with negative outlooks

Fitch Ratings has affirmed Ghana's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B' with Negative Outlooks.

Fitch has also affirmed Ghana's Short-term foreign currency IDR at 'B' and Country Ceiling at 'B'. The issue ratings on Ghana's senior unsecured foreign and local currency bonds have been affirmed at 'B'.

KEY RATING DRIVERS

The affirmation reflects the following factors: Fiscal and external risks remain high, complicated by a slowing economy and low commodity prices. An IMF programme, agreed earlier this year, has improved policy credibility, commitment to fiscal reforms and access to external financing. In Fitch's view, the most significant reform, has been to deregulate fuel prices, largely eliminating the risk that the authorities will re-introduce fuel subsidies.

However, a high degree of uncertainty remains ahead of parliamentary and presidential elections due in late 2016, which may see spending pressures re-emerge as in past electoral cycles. Fiscal consolidation efforts remained on track, with the latest data until July 2015 showing a budget deficit of 3.1% of GDP, against a target of 4%. Revenue over-performed supported by additional tax measures under the IMF programme, while expenditure came in below budget.

This was largely due to lower interest costs, underpayment of arrears, social contributions and grants to government units, which offset over-spending on infrastructure as well as goods and services. Fitch forecasts a cash deficit of 7.8% of GDP, slightly higher than the authorities' target of 7.3%, but lower than the 10.2% deficit recorded in 2014. Deficits are somewhat lower on an accruals basis as the authorities make net repayments of arrears. Government debt jumped to 70.0% of GDP at end-2014 from 39.1% in 2011 - the year prior to the previous elections and ensuing fiscal slippage.

Ghana's debt structure has also deteriorated. Foreign currency debt is now 60% of total debt, against less than half in 2011, largely driven by increased non-concessional financing, leaving the country more exposed to a weaker exchange rate. Domestic debt maturities have steadily declined. High domestic yields and a 60% depreciation in the currency since 2012 have pushed up borrowing costs, with interest payments now accounting for one-third of government revenue -- the highest level among Fitch-rated sub-Saharan African sovereigns. High interest service costs limit fiscal flexibility and will complicate consolidation efforts.

Financing the deficit is expected to remain challenging, particularly with the IMF programme restricting deficit financing by the Central Bank to 0% next year. The Ghanaian cedi has been extremely volatile this year, as dollar inflows from donors and the IMF combined with favourable IMF reviews, have at times supported significant rebounds in the currency. Despite periodic recoveries, downward momentum has persisted, with the currency falling 18% YTD against the US dollar, as Ghana's external financing gap remains large. Ghana's external position is vulnerable, with the current account deficit expected to narrow only slightly to 8.4% of GDP in 2015, down from 10% in 2014 - but still above the 'B' median of 7.4%.

Reserves fell sharply in 1H2015 by USD1.3bn to USD4.5bn (2.9 months of current external payments (CXP)) from a peak of USD5.8bn in November 2014. Net international reserves, which exclude swap facilities, are below two months of CXP. Reserves are expected to be boosted in the coming months, by an expected Eurobond, the annual COCOBOD bond as well as donor inflows (USD500m for 2015), taking them to 3.7 months of CXP at end-2015- above the 'B' median. However, any relief is likely to prove temporary, unless underlying fiscal balances are addressed. Fiscal and external imbalances as well as external and domestic shocks have steadily undermined Ghana's growth prospects. Fitch expects growth to moderate to 3% in 2015 against an average of 8.6% for the previous five years and well below the 'B' median.

Growth is being hampered by power shortages, macroeconomic instability and, more recently, fiscal consolidation. In the medium-term, growth will be supported by a near doubling in oil production by 2017 as well as new gas reserves coming on stream by 2018, which will help to alleviate the electricity shortfall and reduce the oil import bill. Inflationary pressures have intensified in 2015, increasing 17.3% in August from 16.4% in January 2015, due to currency depreciation, fuel price adjustments.

Monetary policy has responded consistently to inflationary pressures, with the policy rate rising to 25% in September up 400bsp since May 2015. The Bank of Ghana has also introduced measures to improve the transmission of monetary policy by merging the policy and reverse repo rates. Credit growth is slowing in line with reduced domestic liquidity. A decade of growth above 7% has resulted in an improvement in social indicators. However, per capita income and measures of human development are still weak relative to 'B' peers. Per capita income of USD1,217 in 2014 is 40% of the 'B' median.

The ratings are supported by Ghana's strong governance record and long democratic history. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger negative rating action include: - Failure to consolidate the budget deficit and stabilise debt levels, or to ease domestic financing constraints. - Failure to stabilise international reserves, jeopardising the country's external financing capacity. - Failure to improve macroeconomic stability and revive growth. The Outlook is Negative.

Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: - An effective fiscal consolidation plan that is consistent with debt peaking in 2016 and then declining.

An improvement in Ghana's external position including a narrowing of the country's current account deficit and an improvement in international reserves.

KEY ASSUMPTIONS

Fitch assumes Ghana's GDP growth will recover to 6% in 2017. This in turn will depend on oil production coming on stream as expected; the continued development of the gold sector; and further investment in infrastructure.

Fitch assumes an IMF programme remains in place through the 2016 elections and fiscal consolidation continues. Fitch assumes no further sustained deep fall in commodity prices that would undermine an already weak external position.