Ghana 'B/B' Ratings Affirmed; Outlook Stable

  • We expect the Ghanaian government will take advantage of relatively strong growth prospects and increased oil production to implement corrective fiscal measures, but that public finances and external accounts will remain under pressure.
  • We are therefore affirming our 'B/B' long- and short-term sovereign credit ratings on Ghana.
  • The outlook remains stable.
On March 15, 2019, S&P Global Ratings affirmed its 'B/B' long- and short-term 
foreign and local sovereign credit ratings on Ghana. The outlook is stable.

The stable outlook balances Ghana's fairly strong growth prospects and 
relatively narrow current account deficits against risks from still-sizable 
budget deficits and a high stock of general government debt.

We could take a negative action if the effectiveness of Ghana's policymaking 
weakened, for example if fiscal deficits were materially larger than our 
expectations, resulting in still-high debt levels.

We could also lower the rating if we saw a risk of material deterioration in 
monetary policy credibility, or if external pressures mounted due to, for 
example, stronger depreciation of the Ghanaian cedi and higher inflation, 
which might result in significant outflows of nonresident capital beyond our 

We could consider raising our ratings if Ghana implements and adheres to 
measures that materially alleviate pressure on public finances beyond our 
expectations without weakening government's capacity to maintain balanced 
economic growth. 

We also see prospects for an upgrade if, alongside fiscal consolidation, the 
current account deficit narrows faster than we expect and external debt and 
gross external financing needs reduce significantly.

Our ratings on Ghana reflect pressure on its public finances, with interest 
payments representing over 30% of government revenues, which is one of the 
highest levels among sovereigns we rate. We project that budget deficits will 
average 4.2% of GDP in 2019-2022. Revenue underperformance will remain a 
concern, and the implementation of flagship projects alongside other 
expenditures in the run-up to the 2020 elections could spur higher spending.

Owing largely to the depreciation of the cedi, we forecast that general 
government debt will increase on average by 6.8% of GDP per year over 
2019-2022. We estimate Ghana's government debt position (net of liquid assets) 
will remain somewhat high, but stable at about 55% of GDP over the forecast 
period to 2022. Furthermore, state-owned enterprises (SOEs)--particularly in 
the energy sector--have a sizable debt stock that we believe could pose a 
contingent liability to the government. 

Although current account deficits are likely to remain below 4.2% of GDP, 
external funding needs are relatively high, and we see risks regarding 
investor sentiment; for example, nonresident investment in the government's 
local currency debt is currently declining. Material outflows of nonresident 
capital would aggravate external funding pressure and fiscal financing 

At the same time, we expect relatively strong growth to support the 
government's efforts to reduce fiscal deficits. Additionally, the recently 
completed recapitalization of the banking sector could help resolve banks' 
asset-quality issues and support private-sector lending. 

Institutional and Economic Profile: A largely stable political situation and 
relatively strong growth prospects are counterbalanced by large expenditure 
  • Ghana is one of Africa's most established democracies, with a track record of peaceful transitions of power spanning almost three decades. However, election-related fiscal pressures have crystalized in the past.
  • Aided by rising oil revenues, the government aims to establish a firm fiscal consolidation path.
  • The economy is reasonably well diversified and economic growth is above that of several peers.
We view Ghana as one of the most stable democracies in Africa. This was most 
recently illustrated by another reasonably smooth transition of power, 
following the December 2016 elections, to the New Patriotic Party from the 
National Democratic Congress. Nevertheless, we think the still-frail state of 
public finances highlights institutional shortcomings and is indicative of 
limited policy predictability.

The government started to more effectively address its public finances in 
2017, and, as a result, we expect a modest reduction in general government 
deficits to an average of 4.2% of GDP over 2019-2022, from an average of 6.3% 
for 2015-2018. We note that a fiscal responsibility rule to cap the fiscal 
deficit at 5% of GDP was legislated in late December 2018, and the government 
has made efforts to cap transfers to statutory funds, undertaken public 
financial management reform, and attempted to cap payroll numbers.

While we view these efforts positively, it may be challenging for the 
government to implement much-needed fiscal consolidation and maintain fiscal 
boundaries, while simultaneously attempting to introduce growth-enhancing 
economic reforms and upgrade infrastructure and human capital. Nevertheless, 
the government's plan to build a new factory in each of Ghana's 216 districts 
is premised on private-sector participation, with a limited amount of seed 
capital from the public sector, and therefore may not pose a significant 
fiscal burden.

The Ghana Statistical Service (GSS) completed a GDP rebasing exercise in 
September 2018, changing the base year to 2013 from 2006. The revised national 
accounts data also reflect economic activities that were not captured (such as 
natural gas production), or were captured insufficiently (such as agriculture, 
mining, and manufacturing activities). The new data indicate that the economy 
is about one-quarter larger than previously estimated. With the expanded GDP 
base, the historical figures for real GDP growth changed slightly compared 
with the previous series. The rebasing resulted in changes in numerous key 
indicators when expressed as a proportion of GDP, including the fiscal 
deficit, the current account deficit, and the public debt burden. 

Ghana's relatively stable political landscape remains an important factor in 
attracting external financing and for overall investment levels. According to 
the revised GDP figures, Ghana's economy remains dominated by services (about 
40% of GDP), with agriculture contributing a substantial 21% and the mining 
and quarrying sector contributing about 14%. The economy is vulnerable to 
weather conditions and commodity price fluctuations. Since discovering oil in 
2007, Ghana has emerged as a viable oil producer, with production forecast to 
be about 196,000 barrels per day (bpd) in 2019.

Economic activity moderated to 5.3% in 2018 due to somewhat slower growth in 
the mining and quarrying sector (largely oil and gold production). After a 
significant ramp-up in the oil sector, a 12-week shutdown of production in the 
Jubilee fields in early 2018 for technical reasons hampered growth. We expect 
economic growth will remain relatively steady in 2019, partially owing to an 
increase in oil production, and average 4.9% in 2019-2022. Agriculture growth 
could be constrained by aging cocoa plants weighing on Ghana's sizable cocoa 

Our GDP per capita estimate is $2,250 in 2019. We project that medium-term 
growth, and the growth trend, will remain somewhat above peers' with similar 
levels of GDP per capita. Our growth estimates factor in broadly stable oil 
production at about 200,000 bpd and the expected dampening effects on economic 
activity of fiscal consolidation and tightening monetary policy. We forecast 
only moderate growth of private-sector lending, which is likely to constrain 
domestic consumption and private investment. However, development of the 
ancillary gas sector and the introduction of new generating facilities should 
alleviate previous issues associated with electricity provisioning, and this 
could support manufacturing activity in the medium term. 

Flexibility and Performance Profile: Inflation and public finances remain a 
  • Inflation has declined since mid-2016, but pressure could reemerge due to accelerated cedi depreciation.
  • We expect the recent banking sector recapitalization will help revive private-sector lending.
  • Ghana's public finances remain a concern from both a stock and flow perspective. The government has limited room to manoeuver. Both revenue mobilization and expenditure control are essential for the government to keep firmly on the consolidation path.
  • We expect external debt to exceed external liquid assets by about 135% of current account receipts (CARs) on average over 2019-2022 and gross external financing needs to average about 135% of CARs plus usable reserves.
Inflation has moderated since mid-2016, but will remain a concern alongside an 
accelerated depreciation of the cedi. Recent developments in the domestic 
capital markets have presented challenges to local currency performance. The 
cedi depreciated by about 9% against the U.S. dollar year to date in 2019, 
following about 9% in 2018. Pressure on the currency is elevated, in our view, 
largely due to nonresident investors rebalancing their investment position in 
the context of higher U.S. interest rates and volatility in emerging markets. 

These dynamics, coupled with current account deficits, could trigger steeper 
depreciation and aggravate inflation over the coming three years. In our 
base-case scenario, however, we expect the Bank of Ghana (BoG) to pursue real 
policy tightness and mop up excess liquidity, although this might dampen 
growth prospects. As a result, inflation should remain just below the upper 
end of the BoG's target range of 8% plus/minus 2% over the forecast horizon to 

Private-sector credit continued to recover, but at a moderate pace. The 
industry's credit to private enterprises and households recorded a 
year-on-year expansion of 10.5% compared with 13.4% growth a year ago. 
Private-sector credit expanded by only 1.1% in real terms. The banking 
sector's tight credit stance on loans to the private sector was in response to 
improving, but still-elevated levels of nonperforming loans (NPLs), at about 
18% of total loans at year-end 2018. Slower credit growth also reflected 
capitalization risks, given an approaching deadline for recapitalization, as 
well as cost of funds and balance sheet constraints. 

Most of the outstanding NPLs in Ghana relate to the private sector, with 
indigenous private entities accounting for about 75% of the total. The share 
of public-sector NPLs declined over the past year, largely due to 
restructuring of the outstanding debts of electricity companies and Ghana's 
oil refinery. The government's Energy Sector Levy Act (ESLA) helped resolve 
some of banks' asset-quality issues and utility arrears. Under the ESLA Bond 
Program, a special-purpose vehicle entered into agreements with SOEs' 
creditors, under which the legacy debts are either repaid in cash from the 
proceeds of the bond issuances, or settled through debt-swap transactions. Via 
the swap transactions, the legacy debt could be traded directly for bonds 
issued under the program. We think that ESLA bonds will help improve banks' 
asset quality, put their balance sheets in a stronger position, facilitate 
private credit growth, and further strengthen the effectiveness of monetary 
policy transmission. 

In pursuit of strengthening the banking sector and ensuring financial 
stability, authorities have taken several important steps since the 2016 Asset 
Quality Review. The BoG increased the minimum capital requirement for all 
banks to Ghanaian cedi (GHS) 400 million (from GHS120 million in late 2017). 
Following the recapitalization exercise completed in 2018, the number of 
universal banks operating in Ghana reduced to 23 from 32 in 2017. These banks 
have all met the new minimum paid-up capital of GHS400 million. 

In August 2017, the BoG approved the acquisition of two banks by GCB Bank. 
Subsequently, in April 2018, the Ministry of Finance issued a GHS2.2 billion 
bond in order to close the asset-liability mismatch. In the context of 
recapitalization, the BoG merged another seven banks into one in 2018, with 
the government injecting GHS450 million in capital while also issuing over 
GHS6.3 billion in total bonds to bridge the gap between the value of the good 
assets and liabilities of the merged banks. We expect that increased statuary 
capital will provide additional capital buffers to support private-sector 
lending in the medium term.

Ghana has achieved some fiscal consolidation since 2017, bringing the fiscal 
deficit to 3.9% of GDP in 2018 (excluding financial sector clean-up costs), 
compared with 8% in 2016. We estimate the 2018 financial sector bailout costs 
at 3.3% of 2018 GDP, and include these in our assessment of fiscal deficit and 
government indebtedness. We estimate the general government deficit at 7.2% of 
GDP in 2018 when we include the clean-up costs of the bank sector.

Although the 2018 revenue performance was marked by a large shortfall in both 
tax and nontax revenues in relation to the budget, expenditures were pared 
back in response. In particular, domestically financed capital expenditure and 
grants to other government units, including transfers to statutory funds, were 
significantly restricted. 

The government's medium-term fiscal policy envisages the budget deficit 
shrinking to 3.2% of GDP by 2021. One of the key risks, in our view, is that 
government's revenue expectations may not be met. We note that new 
revenue-enhancement and tax-compliance measures implemented in the context of 
the mid-2018 budget review will take time to bear fruit. At the same time, 
flagship projects, including free high school and no-formal education 
programs, could propel higher recurrent spending. The run-up to the 2020 
elections might see faster spending growth too. 

Our projections rest on our assumption that the authorities will strengthen 
revenue administration and broaden the tax base slightly, as nondiscretionary 
spending on wages and interest payments already absorbs more than 90% of 
current total tax revenues. Narrowing deficits after 2020 will be partially 
due to the government having cleared existing domestic supply arrears by 2020.

We note Ghana still has sizable infrastructure deficiencies, despite some 
successes, including an upgraded network of key roads and wider public access 
to electricity and water. Nevertheless, authorities might also rely on further 
capital expenditure cuts, if needed to prevent the fiscal deficit from 
exceeding 5% of GDP in line with the new legislation. 

The authorities' borrowing plan for 2019 rests largely on external funding, 
which could comprise about 65% of total funding. We expect sovereign bond 
issuance could be up to US$3 billion, and the proceeds will be likely used for 
financing infrastructure projects and for liability management. Over 
2020-2022, we expect fiscal deficits will be financed predominantly from 
domestic sources. However, in our view, nonresident participation in the 
domestic bond market will be limited.  

We estimate Ghana's net government debt position (net of liquid assets) to be 
54% of GDP in 2019 and remain stable at about 55% in the forecast period, with 
interest costs continuing to consume about 33% of government revenues each 
year. At end-2018, 65% of total government debt was external, with 50% 
denominated in foreign currency. As a result, the debt stock is sensitive to 
the cedi's depreciation.

Nonresident holdings of government local currency debt declined to 30% in 
2018, after increasing to 38% in 2017 from about 22% in 2016. With the 
exchange rate relatively stable and inflation reducing, high real returns on 
local currency debt were initially quite attractive to foreign investors. 
However, investors' flight from emerging markets from the second half of 2018 
posed challenges to the government's smooth implementation of a medium-term 
financing strategy. The external contagion effect of the investor pullout from 
emerging economies reduced participation of nonresident investors in Ghana's 
domestic bond markets, and propelled stress on exchange rate markets. As a 
result, yields on domestic government bonds increased across the maturity 
spectrum in 2018. Specifically, the yield on two-year Government of Ghana 
bonds increased by 200 basis points (bps) and on three-year bonds by 125 bps 
in the primary market. Although ongoing fiscal and banking sector reforms 
accompanied by potential tightening of the monetary stance will help restore 
investor confidence, there remains a risk of capital outflows, given a 
still-high amount of nonresident holdings of public-sector local currency 

We estimate the size of energy sector's SOE debt, much of which is overdue, at 
about 10% of GDP, which we assess as a contingent liability for the 
government. We expect the government's ESLA Bond Program to be worth about 
3.5% of GDP when fully drawn (currently issued debt is about 1.8% of GDP) and 
will replace some of the SOEs' existing debt. Energy sector SOEs, in 
particular the Volta River Authority and Electricity Co. of Ghana, have 
experienced losses, despite increased tariffs in previous years. A reduction 
in utility tariffs in 2018 could pose additional financial challenges to the 
utility SOEs if an expected increase in demand does not materialize or greater 
use of cheaper domestic gas does not yield expected cost efficiency.

Ghana's current account balance has improved significantly in recent years due 
to increased commodity exports, with a deficit of 9.0% in 2013 shrinking to 
about 3.2% in 2018. We expect the current account deficit to average about 
3.9% of GDP in 2019-2022. We expect oil production to reach an all-time high 
of about 210,000 bpd in 2020 before falling to about 200,000 bpd through 2022. 
We expect stable deficits will also be supported by relatively strong cocoa 
prices and a reduction in gas imports, as the Sankofa field commenced 
significant gas production in the second half of 2018. A tightening fiscal and 
monetary stance should also support external performance by dampening domestic 
demand for imported goods. 

In our base-case scenario, net foreign direct investment (FDI) inflows and new 
nonconcessional borrowings should be sufficient to finance current account 
deficits in 2019-2020. FDI inflows will begin to moderate as a percentage of 
GDP as incremental investment in the oil sector moderates. We forecast gross 
useable foreign currency reserves will stand at $4.6 billion by 2022 compared 
to $5.5 billion in 2020, and remain at just above two months of import 
coverage throughout the forecast horizon.

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