March 18, 2022/Cordros Report
Over the past few months, there have been concerns about Ghana’s fiscal framework, given funding concerns in the face of tightening global liquidity conditions. This has caused the country’s credit rating to be adjusted downwards to reflect the inherent risks, consequently leading to rising costs of debt internally and externally. Given this situation, we assess the country’s debt sustainability and further determine how the ongoing Russia-Ukraine conflict could impact Ghana’s external and fiscal accounts. To achieve this, we analyse the country’s fiscal and debt position, adopting debt sustainability metrics to assess potential fiscal stress over the short to medium term to determine whether these concerns are founded or not.
Debt Profile is Unsustainable, but Short-Term Debt Default is Unlikely
Investors’ concerns started in November 2021 when the government presented its 2022FY budget. Upon the presentation of the budget, the concerns increased given the government’s revenue-led fiscal consolidation plan, which was overoptimistic. Accordingly, an expected revenue underperformance could aggravate the lingering debt sustainability concerns. Besides, tightening global financial conditions also poses a significant headwind to funding the 2022FY budget, especially as Fitch and Moody’s both downgraded the country’s sovereign credit rating to ‘B-‘ and ‘Caa1’, respectively. These ratings reflect downgrades to speculative or non-investment grades according to the rating scale of the agencies. Against the preceding, we assess the possibility of a debt default in the short-term using the debt sustainability metrics.
Overall, our analysis shows that the public debt as a percentage of GDP breached its threshold as of 2020FY, while the external debt to export ratio is estimated to have breached its threshold in 2021E. At the same time, the trend of the other indicators shows they are not immune from risks over the medium term. Meanwhile, the IMF classifies a country as “high risk” of external debt distress if any of the external debt burden indicators breaches its threshold under the baseline scenario, but the country does not currently face any repayment difficulties. Accordingly, we reiterate that Ghana’s current fiscal stress is more of a funding concern than near term debt default.
A Prolonged Russia-Ukraine Conflict Favours Ghana’s External Account
The Russia-Ukraine crisis has led to increased commodities prices, including crude oil, gas, wheat, corn, nickel and palladium – Russia and Ukraine are essential to the global supply of these commodities. Besides these, the price of gold has also reached new highs in recent times following investors’ move towards safe-haven assets, given the uncertainties surrounding the conflict. According to the United Nations Conference on Trade & Development (UNCTAD), Ghana’s commodity exports (agriculture, fuel, metals) as a percentage of GDP settled at 23.2% between 2018 and 2019 (2013-2017 average: 25.9%). Hence, Ghana is the second-largest commodity exporter in Africa after Ivory Coast (commodity exports’ share of GDP: 26.3%). Accordingly, a sustained increase in commodities prices could provide a tailwind for the Ghanaian economy via increased proceeds from exports.
External Account: CA Deficit Could Moderate Compared with Initial Estimates
Between 2018 and 2019, commodities contributed 95.9% to Ghana’s total exports while commodity imports, as a share of total imports, settled at 25.7%. As of 2020FY, the top three commodity exports (gold, crude oil and cocoa) contributed 83.2% of the total merchandise exports – gold (47.0%), crude oil (20.1%), and cocoa (16.1%). Therefore, a prolonged increase in commodities prices due to the lingering tensions between Russia-Ukraine would improve Ghana’s external account in 2022FY.
Fiscal Account: No Material Change Expected in Revenue Performance
The Ghanaian government’s revenue from commodities largely comes from royalties and taxes. Therefore, we expect increased receipts from taxes on oil companies, royalties from mining companies, and petroleum tax – all of which contributed 14.7% to total government revenue as of H1-21. However, given the relatively low contribution of these sources to total revenue, we do not expect a material change in revenue compared with a scenario where the Russia-Ukraine conflict is not prolonged. Accordingly, we believe an improved fiscal position in 2022FY would be largely dependent on the actual implementation of the 20.0% expenditure cut, as stated by the finance minister in February.
