Moody’s lauds policy rate tightening

Credit rating agency Moody’s says Monday’s tightening of the monetary policy rate by the Bank of Ghana as part of measures to suppress and anchor inflation expectations provides a boost for the country’s sovereign credit quality.

The increase in the policy rate by 100 basis points from 25 percent comes after Finance Minister Seth Terkper had announced in the 2016 budget government plans a reduction of budget deficit from 7.3 percent this year to 5.3 percent of GDP next year.

According to Elisa Parisi-Capone, Assistant Vice President at Moody’s, “Although downside risks persist, proactive policy adjustments should help to preserve macroeconomic stability and support sovereign credit quality, a credit positive”.

The comparison of fiscal results over the first nine months of the year with the budget targets and with 2014 budget execution data over the same period shows outperformance in particular on the revenue side: revenues and grants to GDP were 17 percent as of September 2015 as compared to the 16.3 percent target in the revised budget and in contrast to 15.6 percent over the same period last year.

Total expenditures and arrears clearance at 22.1 percent of GDP was broadly in line with the target and with last year’s performance, whereas the fiscal deficit registered 5.1 percent of GDP over the first nine months this year against a deficit target of 5.7 percent of GDP and the 6.4 percent of GDP deficit recorded over the same period last year.

According to Ms. Parisi-Capone, the country’s fiscal deficit targets are for 7.3% of GDP and 5.3% in 2015 and 2016 respectively, compared to Moody’s expectation of a more muted fiscal deficit reduction of 8.0 percent in 2015 and 7.5 percent in 2016.

“Despite the better-than-expected performance, risks to the fiscal consolidation path for the rest of this year and for 2016 remain. Some of the risks relate to the front-loaded investment expenditures required to address the power crisis in order to meet the 2016 growth target of 5.4 percent underlying the 2016 budget.

“Election-related expenditures in 2016 are also a risk because they have contributed to past expenditure overruns. However, we expect the constraints imposed by the three-year International Monetary Fund (IMF) programme adopted in April 2015 to help prevent a renewed sharp increase in wage-related expenditures as occurred in 2012,” the Moody’s analyst said.

Ghana’s fiscal consolidation effort is accompanied by a tighter monetary policy stance, which is aimed at anchoring inflation expectations and stabilising the exchange rate.

Just this Monday, the central bank further increased the policy rate to 26 percent — one of the highest policy rates in the world — from 25 percent in September; citing significant deferred utility tariff hikes expected later this year, in addition to worsening external financial conditions.

The monetary policy transmission mechanism, Moody’s said, is likely hampered at such high-interest rates so that one percentage more may not significantly alter inflation expectations, especially in view of a significant utility tariff increase.

Ms. Parisi-Capone said with interest expenditures already projected to exceed 30 percent of revenues in 2015 in the revised budget, it is one of the major constraints on debt affordability and on Ghana’s credit profile.

“In our view, the reduction and eventual elimination in deficit monetization targetted under the IMF programme is more significant for signalling purposes.

Higher Eurobond risk premiums and reduced foreign investor participation in the domestic debt market are manifestations of worsening external financial conditions.

“The risks to our revised growth outlook of 5.8 percent in 2016 are on the downside owing to the economic headwinds from credit constraints and declining purchasing power from utility tariff hikes. However, we expect GDP growth to receive a boost from the TEN oil field production, on schedule to start in the second half of 2016,” she said.