Ghana's 2013 Fiscal deficit to GDP target of 9% realistic

Ghana's fiscal overrun in 2012 has led to renewed concerns about the country's budgetary weaknesses and the sustainability of Ghana's public finance. In particular, the 2012 excesses have helped to entrench the pattern of a "4-year political economy cycle" of fiscal indiscipline which is not healthy for the market - especially in anchoring medium term macroeconomic risk expectations to the downside. We have been making a case for fiscal reforms that will overhaul the budgetary process and re-align expenditure more favorably to the productive sectors of the economy; and we think these reforms are urgent if the country is to attract long term capital at lower interest rates. There is certainly the need for government to streamline its expenditure even if revenue enhancement is anticipated.

While a short-term significant contraction in deficit to below 9% will be difficult in lieu of the stress on Ghana's fiscal accounts - and a gradual approach is welcome; going forward, we expect the government to adopt some policy measures, including the under listed, if medium-term fiscal credibility is to be restored.

* An implicit target on expenditure growth as a percentage of GDP, where revenue growth will be higher than expenditure growth in a given period. * An explicit adoption of fiscal rules that will put a cap on deficit spending or a debt ceiling, which can only be waived by Parliamentary approval. * Restructuring of the public debt profile - especially lengthening the yield curve to reduce borrowing pressures on the money market, and improving macroeconomic stability to enhance the issuance of Sovereign Debt.

For our investors, the GH¢8b deficit financing needs outlined in the 2013 budget implies that interest rates for Ghana are likely to remain high at least in the short-term. Unless government issues medium-term government securities which are open to foreign participation, domestic savings is not sufficient to absorb the financing needs of government in 2013 - and we are inclined to believe that money market yields will remain above 15% throughout the year, and probably above 20% in the second quarter. This trend may be further worsened by the inflation outlook in 2013; as the new revised inflation basket combined with energy and utility price hikes as well as public sector wage challenges could entrench inflation in double digits.

Clearly, shifting the attention of investors to medium term notes is critical in lowering interest rates for Ghana - and would be less harmful for the economy in the short-term. Accordingly, our view is that the yield on the 91-day and 182-day treasury bills could decline marginally, but at the expense of medium term borrowing. Overall, investor interest in the country is expected to remain strong, as Ghana remains a stable democracy and GDP growth is expected to average 7-8% on hydrocarbon discoveries.

Best regards, Databank Research