The Credit Ratings Agency, Fitch Ratings has observed that Ghana risks exposing itself to a heavy debt-service burden and fiscal slippages following the 2021 budget presented on the 12^th March 2021.

The Ratings Agency advances that this is due to the slow fiscal consolidation path spelt out in Ghana’s 2021 budget, and the medium term fiscal framework. As indicated in the budget, the path is supported by new revenue measures and the gradual implementation of expenditure cuts.

Ghana’s public debt at year-end 2020 reached 76.1 percent of GDP, 4 percentage points higher than Fitch’s earlier forecast. Although it stayed Ghana’s long-term foreign currency rating at ‘B’ with a stable outlook in October 2020, an assessment of the medium-term debt trajectory would be an important rating sensitivity, Fitch says.

This notwithstanding, Ghana hopes to reduce the fiscal deficit from 13.8 percent of GDP (including energy and financial sector restructuring cost) to 10.8 percent of GDP in 2021, 7.5 percent in 2022 and below 5 percent by 2024.

Slippage risks to surface ahead

Fitch observes that there is a high risk that public finances may deviate from targets outlined in the budget. With particular emphasis placed on the government’s lack of a clear majority in parliament.

Meanwhile, the slow path of fiscal consolidation means that Ghana’s ability to absorb any new shocks will remain weak for a long time. That said, any such shocks has the tendency of pacing up the rising debt levels beyond 2022, Fitch indicates.

The budget highlights that interest payments were equivalent to 6.4 percent of GDP in 2020. The enlarged debt accumulation in 2020 automatically means that interest payments will further increase in 2021.

Fitch, therefore, forecasts interest payments to pass 50 percent of fiscal revenue in 2021. Thus, surpassing the threshold of around 11 percent for ‘B’ rated sovereigns. However, Fitch expects that Ghana’s interest spending as a share of revenue and GDP to fall in 2022. But, it will still be above the ‘B’ median for a couple of years.

Furthermore, the Ratings Agency asserts that Ghana has one of the highest policy rates among emerging market-sovereigns. Therefore, Ghana’s interest rate has a lot of room to fall further, in so far as the government maintains its policy credibility and the global environment continues to support a falling rate of inflation.

Other risks ahead

New issuance of bonds on domestic debt markets may reduce due to bond issuance on the international debt market. This action will ease external funding pressures and support overall macroeconomic stability. The government plans to raise up to USD5 billion on international capital markets in 2021.

Risks to budget’s revenue forecasts may also feature, Fitch hints. Government plans to increase fiscal revenues by adding 1 percent increase to VAT and the National Health Insurance Levy. However, achieving total revenue of an average of 16.8 percent of GDP over 2021–2024 may be difficult, Fitch asserts. Considering an average total revenue of 15.4% of GDP over 2016–2019.

It is not all gloomy for Ghana. There are factors that could provide some space for the public finances. According to Fitch, projected public capital expenditure, at 4.1% of GDP in 2021, is high compared with the 2% average in 2018–2019, and may fall short of target.

The government’s 5% forecast for average annual economic growth in 2021–2024 also appears conservative. Given, Ghana’s pre-pandemic performance and the low base of comparison in 2020, which may point to some upside potential for revenue.