Doubts hang over Govt’s fiscal objectives

NOT too long after his presentation of the 2015 budget, there are dark clouds over the probability of achieving government’s set targets.

Both domestic and international bodies have reacted to the budget statement, one of them being Barclays Research.

The Bank’s Research team though impressed with government’s targets for the 2015 fiscal year was surprised by the medium-term fiscal deficit target of 3.5 per cent of Gross Domestic Product (GDP) by 2017, “while the average real GDP growth target of 6.8 per cent over the 2015-17 period also appeared ambitious though not impossible.”

According to the research team, with the government’s own growth estimate for 2015 being at 3.9 per cent, economic growth will have to surge quite significantly in the remaining two years if the target is to be achieved.

“This is possible as long as oil and gas production comes on stream without any further delays,” it said.

Similarly, while a 3.5 per cent (of GDP) fiscal deficit target by 2017 is very possible assuming an uninterrupted prudent stance over the next three years, the fiscal risks posed by the 2016 elections obviously present an important hurdle.

It is instructive to recall that Standard & Poor's, during its ratings downgrade of Ghana to B- (Stable outlook) from B, warned that "government will find agreeing and implementing a conditional lending program from official lenders difficult" and will find the conditions of an IMF programme hard to meet "particularly with parliamentary and presidential elections coming up in late 2016".

There is no doubt that market commentators will most likely focus on the government’s ability to contain spending in line with targets in the upcoming fiscal year after frequent and significant slippages in recent years.

To that end, the Finance Minister indicated that total expenditure in 2015 is estimated at GHS41.2bn (30.5 per cent of GDP), which is a 15.6 per cent increase over the projected outturn for 2014. Compensation of employees (wages, salaries, allowances, pensions, gratuities and social security contributions) is projected at GHS12.3bn (9.1 per cent of GDP) which is 10.3 per cent above that of 2014 and makes up 30 per cent of total expenditure.

The other large and rapidly-growing expenditure item, total interest payments, is projected at GHS9.6bn (7.1 per cent of GDP), which is a large 22 per cent above that of 2014 and will constitute 24.4 per cent of total expenditure.

Disappointingly, with current expenditure making up over four-fifths of total expenditure, capital expenditure is projected at GHS7bn, or 17.8 per cent of the total. An estimated 36.8 per cent of the total amount will be financed from domestic sources and the remainder from foreign sources.

Government has committed itself to ongoing expenditure measures which include negotiating public sector wages within budgetary constraints, continuing its freeze on employment in all public sector areas and continuing to reduce subsidies.

On the revenue side, provisional figures for January to September 2014 show an increase of 26 per cent y/y in domestic revenues compared to the corresponding period in 2013, though the outturn was 4 per cent lower than budgeted.

Lower tax revenue in the period was partly attributed to a slowdown in economic activity and lower import volumes arising from the sharp depreciation of the local currency (cedi). Against this backdrop, for 2014 as a whole, total revenue and grants are expected to be 5.7 per cent below the revised budget (July 2014) estimates.

For 2015, total revenue and grants are targeted to increase 31 per cent y/y, largely underpinned by tax changes. In the main, the new revenue measures entail the imposition of a Special Petroleum Tax of 17.5 per cent (as part of a rationalization of the VAT regime and change in petroleum pricing structure), the extension of the National Fiscal Stabilization Levy of 5 per cent and import levy of 1-2 per cent to 2017, the implementation of VAT on fee-based financial services, a 5 per cent VAT rate on real estate and an increase in the withholding tax on Directors' remuneration to 20 per cent from 10 per cent.

Collectively, the above measures are expected to see a 31 per cent y/y increase in tax revenues (which account for c.80 per cent of total revenues and grants) in 2015 (see Figure 1). Benchmark oil revenue is expected to be 2.6 per cent of GDP in 2015, based on oil price and production assumptions of USD99.37/bbl (2014 assumption: USD93.33/bbl) and 102,033 bpd (93,029bpd in 2014), respectively. The government is cognizant of the recent fall in oil prices (and generally lower commodity prices, with gold and cocoa being Ghana’s other main exports) as a risk to the 2015 expectations. Another clear risk for Ghana’s 2015 budget plan is the performance of the economy, with real GDP growth already expected to ease to its lowest level in over a decade.

The planned fiscal consolidation over the medium term suggests a constructive backdrop for local yields. However, we note that the 2015 financing mix is skewed towards domestic sources, with net domestic borrowing expected to rise in nominal terms to GHS7.6bn (5.6 per cent of GDP) from an estimated GHS5.6bn (5.0 per cent of GDP).

The increased local issuance will be in the face of significantly higher maturities (GHS2.4bn versus GHS1.1bn in 2014) in tenors accessible to offshore investors (3y and above), while shorter dated maturities (3m-2y) will remain significant after increased issuance here in 2014.

As part of its debt management strategy, Finance Minister Terkper noted that the government will consolidate its policy of using short-term borrowings primarily for liquidity management purposes while it will also work towards extending the yield curve to 10 years. That said, elevated yields appear to have contributed in the government cancelling several long-end auctions this year.

The Central bank has noted that with the net domestic borrowing expected to be higher in 2015, inflationary pressures still not abating (with upward risks from the latest tax measures), monetary policy is likely to remain tight for some time.