Bangkok--24 Jul--Standard & Poor's
Standard & Poor's Ratings Services today said that the three-year program approved by the International Monetary Fund (IMF) for the Republic of Ghana (B+/Negative/B) provides a window of opportunity for the reduction of imbalances that have weighed on the sovereign rating.
The three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), which totals about $600 million, targets sustained fiscal consolidation, a build-up in foreign exchange reserves, and structural areas such as public sector reform and cost recovery for utility tariffs. In parallel, Ghana is due to receive a Special Drawing Rights (SDR) allocation of about $450 million later this year as part of the Group of 20's April agreement affecting the IMF's member countries, and the World Bank is due to lend a total of $300 million to Ghana this year.
The last two to three years saw the emergence of large twin deficits on the fiscal and external sides, driven by rapid spending growth and high oil prices. In the run-up to the December 2008 elections, this culminated in a fiscal deficit of 15% of GDP in 2008, pressures on domestic borrowing, and a large overall deficit on the balance of payments weighing on currency stability. We revised the outlook to negative in March 2009, to reflect the likelihood of a downgrade if the new government's planned fiscal correction is not fully implemented, or if debt-financing challenges intensify in the context of the country's shallow domestic markets and weakened global risk appetite (see "Ghana At A Crossroads: Twin Deficits, Twin Straitjackets", published on April 24, 2009, on RatingsDirect).
So far this year, while fiscal trends show tentative improvements and the trade deficit is declining, pressures remain. In particular, the first half of the year saw further currency depreciation, a continued shift of domestic financing to shorter-dated instruments, and further rises in treasury bill rates. From a ratings perspective, the announced multilateral support is a positive in several respects. The loans will help to fill the government's still large financing gap and should relieve some of the pressure on domestic markets. In addition, along with the SDR allocation, they will help to rebuild the central bank's foreign exchange reserves, providing a larger buffer against external liquidity strains. Finally, conditionality under the PRGF arrangement provides a policy anchor for long-delayed structural reforms, which we believe would have a direct impact on expenditure sustainability.
Nevertheless, while multilateral and donor loans can underpin macroeconomic stabilization, a lasting reduction of Ghana's imbalances still requires significant fiscal consolidation. Faltering commitment to fiscal consolidation in anticipation of oil revenues, or any deterioration in donor support, would likely lead to a downgrade. For the rating to remain at 'B+', there would need to be tangible reductions in the fiscal and external deficits, a lengthening of domestic debt maturities, and a timely start to oil production.
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