Fitch warns BoG against printing money to finance deficit

Credit rating agency, Fitch has noted that the Bank of Ghana's (BOG) role in funding Ghana's budget deficit in the first quarter illustrates the financing challenges the government faces given surging yields and a deteriorating maturity profile.

According to Fitch, attempts to print money to finance the deficit will aggravate already high inflation, which surged to 14.7% in April this year and contribute to further cedi weakness. The cedi has fallen 21% since the start of the year.

“Fiscal and external vulnerabilities have mounted in Ghana, and were reflected in rising bond yields and cancelled bond auctions as market participants appeared increasingly wary. Non-banks - usually among the largest purchasers of government paper - became net sellers in the first quarter of this year.

Instead, the 2.1% of GDP first quarter of this year budget deficit was financed by the central bank, which provided funding equivalent to 10% of government revenue - twice the BOG's own full-year limit.

“The yields on three- and six-month treasury bills, which made up 25% of domestic debt in 2013, have surged in recent months, with yields rising 520bp to 24.07% between November 2013 and June 2014. The government did not issue as planned five- and seven-year bonds in March and May respectively, due to punitive rates,” it said.

Ghana plans to move ahead with a new Eurobond and has hired advisers to raise as much as US$1.5billion, but attracting dollars to fund the current account and budget deficits looks increasingly challenging as a successful issue might ease immediate external financing pressures, but the cost would likely be high.

Fitch expects rising interest costs and weaker revenue growth on the back of rising macroeconomic uncertainty to push the budget deficit over 10% of GDP - the third consecutive year of double digit budget deficits and above the government's target of 8.5%.

This, combined with the steep depreciation of the cedi will see debt jump again to 61% of GDP by the end of 2014, from 58.2% at end-2013. Debt servicing costs have also risen steeply, to an estimated 6% of GDP in 2014 from 3.3% of GDP in 2011, adding to the intractable nature of Ghana's fiscal position.

“External financing conditions will remain extremely tight over the coming months. Foreigners held 21% of domestic debt at end-2013, down from 26% in 2012. Of this, roughly one quarter was due to mature by the end of this month. With some recent auctions suggesting foreigners' unwillingness to rollover existing debt, this could see a further outflow of funds adding to pressure on the cedi.

Further stress might arise from Ghanaian banks repaying dollar loans taken out during 2013, and there are potential risks of further dollar outflows if the BOG were unable to roll over swap facilities and loans.

Gross external financing requirements, net of FDI, stand at roughly 70% of reserves. Reserves were US$4.7 billion in March 2014, a fall of US$900 million over the quarter, and just 2.3 months of current external payments,” the Agency added.

Fitch placed Ghana's 'B' IDR on Negative Outlook in March 2014 highlighting deteriorating external and fiscal balances and noting the increasing challenge and cost of financing the deficit.

A further deterioration in external finances and an erosion of international reserves that jeopardised external financing capacity are ratings sensitivities. The next scheduled rating review will be on 26 September 2014.