A rating agency, Fitch, has projected Ghana’s stock of public debt to hit 72.8% of GDP at the end of the year 2020.

This is according to its recent ratings released on Friday, October 16, 2020.

“We forecast debt at 72.8% of GDP by end-2020, which includes the outstanding stock of GHS7.6 billion (2.1% of GDP) in Energy Sector Levy Act bonds. We expect debt to continue rising through 2022, although at a slower pace”.

The rating agency however explained that, the failure to execute planned reforms in energy sector would see a continued build-up of arrears and higher debt.

The agency pointed out that the government’s 2019 Energy Sector Recovery Program indicates that sector arrears could reach as much as USD12.5 billion (18% of 2020 GDP) by 2023.

According to the rating agency, “the pandemic shock has exacerbated Ghana’s already-weak public finances. The government presented a revised 2020 budget in July as part of its Mid-Year Budget Review (MYBR), which contained an additional GHS11 billion (3% of forecast 2020 GDP) in COVID-related expenditure. It also forecast domestic financing costs to rise by approximately 2% of GDP”.

Fitch stated that the government had brought the commitment basis deficit to below 5.0% in 2017-2019, following the 2016 election-year blowout. In addition to this, Fitch Ratings noted thatcash deficits remained high as the government paid down domestic arrears and realized the cost of contingent liabilities in the banking and energy sectors.

Fitch also stated that the cost of bank recapitalization added an estimated GHS18 billion (5.5% of 2020 GDP) to cash deficits over 2018-2020. Clearing arrears in the energy sector added 1.6% of GDP to the 2019 deficit and it is assumed to add an additional 1.0% a year through 2023. “We expect the 2020 cash deficit to be 13.6% of GDP”.

Growth forecast

The rating agency expects Ghana’s economy to grow by 2.0% in 2020, returning to 5.0% by 2022. However, low global oil prices are expected to inhibit investment in Ghana’s oil infrastructure and could weigh on medium-term growth. The oil sector, according to the agency, “had been a major growth contributor over 2017-2019”.

Inflation forecast

 Fitch forecasts 2020 average inflation at 9.7%, well above the forecast ‘B’ median of 4.5%, but lower than Ghana’s five-year average of 12.9%.  This is against the backdrop that the country’s inflation had accelerated to over 11.0% in May, but has slowed in recent months.

“In our view, liquidity pressure may increase in 2021, partly because risks associated with the central bank’s deficit financing will increase if sustained at a high level. The government, on average, borrowed GHS1.3 billion (slightly more than 1% of GDP) from the Bank of Ghana annually in 2011-2016, which allowed for greater fiscal deficits and contributed to higher inflation through the fiscal dominance of monetary policy”.

Fiscal deficit

The revised budget was approved by Parliament along with the government’s request to suspend the fiscal rules contained in the Fiscal Responsibility Act of 2018, which includes a fiscal deficit ceiling of 5% of GDP. The suspension of the fiscal deficit Act and the general ease in government spending behavior is expected to weigh down on the country’s deficit.  

Based on this, Fitch stated that the country’s fiscal deficit is expected to end the 2020 at 10.5% of GDP, more than twice the 2019 commitment basis deficit of 4.7%. This, the agency attributed to the increased expenditure contained in the revised budget and lower tax revenue.

The agency further noted that, government had brought the commitment basis deficit to below 5.0% in 2017-2019, following the 2016 election-year blowout. However, cash deficits remained high as the government paid down domestic arrears and realized the cost of contingent liabilities in the banking and energy sectors.

Overall ratings

Fitch Ratings has affirmed Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook.

The affirmation reflects Fitch’s expectation of a gradual recovery in economic performance and fiscal revenue following the coronavirus pandemic shock, a stabilization of debt/GDP and the ready availability of external and domestic financing sources.

“This is balanced against the risk that post-election fiscal slippages or a weaker economic recovery will worsen fiscal and external debt metrics”.