Fitch forecasts 72.8% debt-to-GDP by end of 2020

Fitch says Ghana’s interest payments for 2020 will rise because of greater reliance on the domestic debt market, where interest rates are higher than for foreign-currency debt

The international rating agency Fitch has projected Ghana’s debt to GDP at 72.8% by the end of this year.

In its latest ratings report on Ghana, Fitch said, “We forecast debt at 72.8% of GDP by end-2020, which includes the outstanding stock of GHC7.6 billion (2.1% of GDP) in the Energy Sector Levy Act bonds. 

“We expect debt to continue rising through 2022, although at a slower pace. However, the failure to execute planned reforms in the energy sector would see a continued build-up of arrears and higher debt. The government’s 2019 Energy Sector Recovery Programme indicated that sector arrears could reach as much as US$12.5 billion (18% of 2020 GDP) by 2023.”

Fitch said, the previous National Democratic Congress (NDC) government, “on average, borrowed GHC1.3 billion (slightly more than 1% of GDP) from the BoG [Bank of Ghana] annually in 2011-2016, which allowed for greater fiscal deficits and contributed to higher inflation through the fiscal dominance of monetary policy”.

High debt service

It said Ghana’s high debt-service burden weighed on its rating, adding that the country’s “2020 debt/GDP ratio is slightly higher than our forecast ‘B’ median of 67.3%. However, we forecast that government debt will reach 530% of revenue, much higher than the 336% ‘B’ median.”

The report said, “Furthermore, interest expense is set to reach 49% of government revenue in 2020, four times the ‘B’ median of 12%. Ghana’s interest payments will rise in 2020 following greater reliance on the domestic debt market, where interest rates are higher than for foreign-currency debt.”

Fitch noted that although Ghana remained somewhat reliant on Eurobond flows and other international borrowings to bolster international reserves, external pressure has been less than expected.

Peformance of the cedi

It averred that the cedi, supported by limited BoG forward auctions, “has depreciated by 3% year-to-date, compared with an average depreciation rate of 12% in the ten years to 2019”. Moreover, “robust gold exports and some import compression have kept the trade balance in surplus”.

Fitch forecasts the current account deficit will widen modestly to 3.9% of GDP from 2.8% in 2019.

“We expect gross reserves to end 2020 at US$6.6 billion, broadly the same as in December 2019, as some foreign-exchange intervention by the BoG to support the currency is offset by new inflow from debt and 4Q cocoa receipts.

“The import compression will slightly improve reserve coverage to 2.8 months of current external payments, from 2.7 in 2019.”

Financial sector

The ratings agency says that Ghana’s banks were now stronger following the BoG-led financial sector clean-up and recapitalisation, which raised minimum capital requirements and forced sector consolidation.

Capitalisation and liquidity have improved but economic headwinds will delay substantial improvement in asset quality, it forecasts.

“Non-performing loans/total loans fell to 14% in 2019, from 22% two years prior, but the ratio will remain high as private-sector credit growth slows in 2020.

“We expect real private-sector credit growth to remain positive in 2020, but in the low single digits,” the report says.

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