Ghana expects S&P, Fitch ratings upgrade

....on positive economic indicators

Ghana is expecting improvements in its credit ratings after it was last rated by the Standard & Poor’s (S&P) and Fitch Ratings, two renowned rating agencies, in 2010.

The country’s macro economic indicators have been seeing positive signs since the last ratings.

The S&P cut Ghana’s ratings from B+ to B citing lack of clarity in the country’s oil sector, the management of government’s oil revenues as well as the large fiscal deficit.

The credit rating is S&P’s opinion on the general creditworthiness of a country or institution or the creditworthiness of a country with respect to a particular debt security or other financial obligation. The rating placed Ghana at par with Kenya, Sri Lanka and Bolivia.

This rating sparked controversies as analysts, economists and government officials questioned the basis of the downgrade.

Mr Samir Gadio, emerging markets strategist at Standard Bank Plc in London told the Bloomberg publication on August 27, 2010 that the rating reduction was strange and that “a downgrade would have made sense in late 2008 or early 2009 when the fiscal deficit hit 15%” of gross domestic product.”

A deputy Minister of Finance, Mr Seth Terkper in an interview with the Daily Graphic on Tuesday August 31, 2010, also questioned the basis and the reason for a downgrade and explained that the rating agency’s assessment would have been accurate had it come early 2009 or if they had reviewed the country’s projections carefully and preparations for first oil.

The Fitch Rating Agency on the other hand raised Ghana’s long-term issuer default ratings to B+ negating S&P’s B rating.

According to Fitch, the country’s declining inflation rate has eased government borrowing and budget deficit has declined to 10% from 14.5% in 2008 but warned that Ghana’s ratings could face downward pressure if the government returns to “fiscal mismanagement.”

In a recent interview with London-based publication, The Banker, Ghana’s Finance and Economic Planning Minister, Dr. Kwabena Duffuor said he expects that both the S&P and Fitch ratings on Ghana would be upgraded as the country’s macro indicators are the best ever.

“Yes. Our macro indicators are the best ever…We are borrowing locally at 10.4%. Two years ago it was 25%. Our foreign exchange reserves have gone up from $2 billion to almost $5 billion in the same period. Inflation has gone down to single digit figures. And the cedi has been stable since August 2009. So why wouldn’t our rating improve?” asked Duffuor when the publication asked him whether he expects Ghana to be upgraded.

“The agencies were talking to us about arrears. Those were a problem last year. But in the first quarter of this year, we paid almost GH¢1.2 billion ($792 million) in arrears. So arrears are no longer a problem,” he added. S&P on August 5, 2011 rated Ghana B+ in its monthly country transfer and convertibility (T&C) assessments.

The agency gave Ghana four points on the sovereign foreign currency recovery rating with both sovereign local currency ratings Outlook and Sovereign foreign currency ratings Outlook remaining stable at B.

A T&C assessment is the rating associated with the likelihood of the sovereign restricting non-sovereign access to foreign exchange needed for debt service. Standard & Poor’s sovereign foreign-currency recovery ratings reflect its opinion on the extent to which a sovereign government will be able and willing to repay nonofficial foreign-currency debt-holders post-default, it said It forecasts that the country faces budget pressure from spending due to elections and may have a deficit of 7% of GDP this year.

“They will benefit from the oil-related revenue, but we still believe their fiscal expenditure pressures are significant,” credit analyst at S&P Christian Esters was cited by Bloomberg as saying August 12, 2011.

In a recent approved supplementary budget, Dr. Duffuor told parliament that government has raised its budget deficit target to 5.1% of GDP from 4.1%. It is however not known when these agencies will put up Ghana’s credit rating after its last one.

This expectation is coming against the background of the controversial downgrade of the USA from AAA to AA+ by S&P. In his immediate response, President Obama said “We didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction.”

Before the downgrade however, US Treasury officials noticed a $2 trillion error in S&P’s math. The error delayed the announcement for several hours. S&P officials, however, decided to move ahead, made their downgrade official.

The WSJ cited an unnamed US Tresury representative describing the S&P decision saying “A judgment flawed by a $2 trillion error speaks for itself.”