Govt Challenges Moody’s Downgrade

Moody’s Investors Service has downgraded Ghana’s sovereign rating to B2 from B1, citing the country’s rising debt burden and deteriorating debt affordability. In its report, Moody’s stated that the primary driver of its decision to downgrade Ghana’s sovereign rating to B2 was the country’s high and rising debt burden and deteriorating debt affordability. The report indicated that the rating agency expected public debt to exceed 65 per cent of Gross Domestic Product (GDP) by the end of 2015 from 55.7 per cent in 2013, mirrored by rising interest expenses relative to government revenues. Finance Ministry response But in a response to the Moody’s report, the Ministry of Finance stated that short to medium-term prospects for the country remained bright and that the government would continue to work hard on plans to ensure that they materialised. It said the measures that government had announced so far would add value to the country’s raw material base, diversify the economy and include a strong local content element. “We are hopeful that the measures to address the short-term challenges — after allowing for the necessary lags — would form the basis for stabilising and growing the economy when the new opportunities come on stream in the next few years,” it said. It said Moody’s rating was based on the same short-term challenges which the government had identified and was addressing, stressing that the government had brought the bold and comprehensive measures to the attention of ratings and other agencies and pointed out that multi-year fiscal consolidation efforts led to positive medium-term prospects. Moody’s report The Moody’s report said persistently high fiscal deficits were the main cause of the increasing debt ratio. Moreover, it said Moody’s anticipated that any fiscal consolidation from double-digit deficits would be slow over the forecast horizon, in view of rising interest payments, the clearance of arrears and the elections scheduled for 2016. “These factors counteract the revenue-enhancing measures introduced by the government in 2013 and constrain the effectiveness of the government’s efforts to reduce the wage bill as a percentage of tax revenues to 35 per cent by 2017 from above 50 per cent at present,” the report said. It said interest payments had increased significantly over the past year to 23 per cent of revenues in 2013, from 14 per cent in 2012, which placed Ghana in the 95th percentile among all rated sovereigns by Moody’s on that metric of fiscal stress. The report stated that interest payments had continued to rise during the first quarter of 2014, reflecting the high rates on domestic debt. It indicated that domestic debt accounted for slightly less than 50 per cent of total public debt at the end of the first quarter of 2014, about one third of which was of short maturity. Event risk The report stated that the second driver behind the downgrade was Ghana’s increased susceptibility to event risk, particularly liquidity risk in the light of the government’s large debt financing needs. It said the strong pressure on the Ghanaian cedi from the weak overall balance of payments position and from above target inflation at 14.8 per cent as of May 2014 was mirrored by a declining stock of international reserves to low levels. “Gross international reserves at the central bank at the end of the first quarter of 2014 represented 2.7 months of import cover,” it said. Finance Ministry reaction The Ministry of Finance, in a statement, said the corrective measures and further opportunities, notably in the oil and gas sector, would propel the economy on a path of sustainable economic growth and development. In the 2013 and 2014 budgets, it said, the government identified the main items leading to the budget overruns and misalignment — namely, high wage bill, high expenditure on petroleum and utility subsidies, high interest payments, low revenue mobilisation, including low disbursements from development partners, disruptions in gas supply which affected energy production, and falling commodity prices (especially gold and cocoa) on the international market. “For about a year the government has been working on a fiscal consolidation plan to address these factors. First, the revenue measures aim at mobilising more taxes, broadening the tax base, reviewing all the tax laws by Parliament and improving administration. “Second, expenditure rationalisation and efficiency measures included salary rationalisation, refinancing of public debt, limiting the award of new contracts and minimising excessive and non-targeted subsidies. “Third, the government is implementing structural or long-term measures to improve revenue and expenditure management. These include implementation of the Ghana Integrated Financial Management Information Systems (GIFMIS) to budget and accounting processes, setting up a human resource information management system, as well as modernising Ghana Revenue Authority systems and procedures,” it said. Home-grown fiscal The statement said the details of those measures and many more were contained in the Home-Grown Fiscal Consolidation Programme that had been finalised with inputs from the Senchi National Economic Forum. It said the economy had gone through major challenges in the first full year (2013) of implementing the measures. It pointed out that in spite of those major price and energy challenges to the economy and consolidation effort, the fiscal deficit went down from about 12 per cent to 10.1 per cent in 2013 and was projected to decline further by the end of 2014. “In addition, the economy continues to grow at respectable levels, averaging 8.6 per cent in the past five years and 7.1 per cent in 2013, after growing at a revised 8.8 per cent in 2012,” it said. Seth Terkper Responding to the issues raised by Moody’s, the Minister of Finance, Mr Seth Terkper, said it was important to reiterate what the President said earlier that the economy would witness a turnaround with the measures and prospects that had been outlined by the government. He explained that the measures were necessary to consolidate the fiscal situation, in order that “we may not destabilise the medium-term prospects”. Mr Terkper noted that the economy faced serious challenges between 2011 and 2013 but assured the people that that situation was not a permanent feature, “as we have been there before and worked our way out of the challenges”. He mentioned some of the challenges as the falling prices of gold and cocoa, the power crisis and the global financial crisis, saying that the key task for managers of the economy was to have measures to address the challenges as they occurred. Mr Terkper repeated the government’s position that the economy was going through transformation, while the government worked with the agenda to consolidate the country’s middle-income status to the benefit of all Ghanaians.