Fitch: Central Bank Budget Financing Raises Ghana

Vulnerability
Mon Jun 9, 2014 7:31am EDT
(The following statement was released by the rating agency) LONDON, June 09 (Fitch) The Bank of
Ghana's (BOG) role in funding Ghana's budget deficit in the first quarter illustrates the financing
challenges the government faces given surging yields and a deteriorating maturity profile, Fitch
Ratings says. Printing money to finance the deficit will aggravate already high inflation (14.7% in
April 2014) and contribute to further cedi weakness. The cedi has fallen 21% since the start of the
year. Fiscal and external vulnerabilities have mounted in Ghana, and were reflected in rising bond
yields and cancelled bond auctions as market participants appeared increasingly wary. Non-banks -
usually among the largest purchasers of government paper - became net sellers in 1Q14. Instead,
the 2.1% of GDP 1Q14 budget deficit was financed by the central bank, which provided funding
equivalent to 10% of government revenue - twice the BOG's own full-year limit. The yields on three-
and six-month treasury bills, which made up 25% of domestic debt in 2013, have surged in recent
months, with yields rising 520bp to 24.07% between November 2013 and June 2014. The
government did not issue as planned five- and seven-year bonds in March and May respectively, due
to punitive rates. Ghana plans to move ahead with a new Eurobond and has hired advisers to raise as
much as USD1.5bn, but attracting dollars to fund the current account and budget deficits looks
increasingly challenging. A successful issue might ease immediate external financing pressures, but
the cost would likely be high. Fitch expects rising interest costs and weaker revenue growth on the
back of rising macroeconomic uncertainty to push the budget deficit over 10% of GDP - the third
consecutive year of double digit budget deficits and above the government's target of 8.5%. This,
combined with the steep depreciation of the cedi will see debt jump again to 61% of GDP by the end
of 2014, from 58.2% at end-2013. Debt servicing costs have also risen steeply, to an estimated 6% of
GDP in 2014 from 3.3% of GDP in 2011, adding to the intractable nature of Ghana's fiscal position.
External financing conditions will remain extremely tight over the coming months. Foreigners held
21% of domestic debt at end-2013, down from 26% in 2012. Of this, roughly one quarter was due to
mature by the end of this month. With some recent auctions suggesting foreigners' unwillingness to
rollover existing debt, this could see a further outflow of funds adding to pressure on the cedi.
Further stress might arise from Ghanaian banks repaying dollar loans taken out during 2013, and
there are potential risks of further dollar outflows if the BOG were unable to roll over swap facilities
and loans. Gross external financing requirements, net of FDI, stand at roughly 70% of reserves.
Reserves were USD4.7bn in March 2014, a fall of USD900m over the quarter, and just 2.3 months of
current external payments. Fitch placed Ghana's 'B' IDR on Negative Outlook in March 2014
highlighting deteriorating external and fiscal balances and noting the increasing challenge and cost
of financing the deficit. A further deterioration in external finances and an erosion of international
reserves that jeopardised external financing capacity are ratings sensitivities. The next scheduled
rating review will be on 26 September 2014. Contact: Carmen Altenkirch Director Sovereigns +44
20 3530 1511 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Mark Brown Senior Director
Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103,
Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the
Fitch Wire credit market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and
Related Research: Ghana here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN
LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE
OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE
'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE
AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY,
CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT
POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION
OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED
ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR
WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE
ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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