Ratings agencies sound warning

Ratings agencies Fitch and Moody’s have warned that Ghana’s sovereign credit ratings could be downgraded if the fiscal situation does not improve dramatically in 2013.

Fitch Ratings, which last week lowered the country’s credit-rating outlook from stable to negative, served notice that a “failure to set out and implement a credible fiscal consolidation plan as well as improve expenditure control” could lead to the downgrading of Ghana’s B+ Long-term Foreign and Local Currency Issuer Default Ratings.

Fitch made the announcement after the Bank of Ghana (BoG) had said Government overshot its budget-deficit target of 6.7 percent of GDP by almost 100 percent in 2012. The actual gap worsened to 12.1 percent of GDP, the BoG disclosed.

Moody’s Investors Service, which rated Ghana B1 with a stable outlook on February 15, also said downward pressure on the rating could arise from factors that include a “failure to arrest deterioration of the government’s fiscal balance.”

A sovereign credit rating is an assessment of the creditworthiness of a country based on both political and economic factors, and is used by investors who want to purchase bonds issued by a government to determine that government’s ability to pay its debts.

In 2007 Ghana relied on positive assessments by ratings agencies to sell its debut US$750million Eurobond. Standard & Poor’s and Fitch Ratings had rated Ghana B+ with a stable and positive outlook respectively -- ahead of that bond sale, which was oversubscribed by almost 400 percent.

The Ministry of Finance has hinted it will consider refinancing the bond, which will mature in 2017, and is currently trading at a yield that is more than 3.5 percentage points below the initial coupon rate of 8.5 percent.

Taking steps to avert a credit-rating downgrade will maintain the confidence of investors, who will be keeping Ghana’s ratings on their radar as they await Government’s next steps on the maturing bond.

According to Fitch, the rating outlook could return to stable if the government implements an ambitious but realistic fiscal-consolidation plan, and if additional oil revenues help to diversify the economy and boost output.

Moody’s also said the ratings could improve if, among others, Ghana continues to receive substantial investments into the mining and oil and gas sectors “coupled with a stable fiscal regime for commodity revenues”.

Tullow Oil, operator of the Jubilee oil field, says it expects investment to develop the second main offshore discovery, the Tweneboa-Enyenra-Ntomme (TEN) project, to be around US$4.5billion -- excluding lease costs for a Floating, Production, Storage and Offloading (FPSO) vessel.

The outlook for the mining sector is however less certain as Government is in the process of imposing a 10 percent windfall-profit tax, which companies say could freeze investment in the sector. In 2012 Government increased the industry’s corporate-tax rate from 25 percent to 35 percent and formed a committee of experts to review mining stability agreements in a bid to raise its stake in the industry.

Finance Minister Seth Terkper has said Government is counting on an increase in oil production to bump up its revenues this year, as it seeks to cut the large deficit incurred in 2012. Current production from the Jubilee Field is 110,000 barrels per day, which is expected to peak at 120,000 barrels by March.

The government’s upcoming budget will target real GDP growth of around 8 percent, Mr. Terkper said.