The large fiscal imbalance, currency depreciation and huge external financing requirement point to a rocky road ahead for the anglophone flagbearer.
From Argentina to Pakistan and El Salvador to Sri Lanka, debt is the in-vogue four-letter word, as investors seek to avoid countries on the brink of default.
Surprisingly, Ghana is among this group, despite the fact it was recently considered one of the lower risk sub-Saharan investments, with a politically and economically stable environment.
That is no longer the case. Its risks have been soaring this year, putting president Nana Akufo-Addo’s New Patriotic Party administration under considerable pressure – and for good reason.
The country is saddled with uncomfortably high debts worsened by the pandemic and the war in Ukraine. With emerging-market risk aversion prompting capital outflows amid rising borrowing costs, the government’s ability to service these liabilities is being questioned.
Ghana is down four places in the global rankings this year, to 81st out of 174 countries, and has slipped down the fourth of five tiers in Euromoney’s global risk survey, implying a low level of investor safety.
During a parliamentary debate on the government’s mid-year budget review, Cassiel Ato Forson, a former deputy minister of finance from the opposition Democratic Party Congress, raised alarm bells by warning that Ghana’s national debt would reach 90% of GDP at the end of this year, despite the government making some progress on cutting the deficit.
The IMF is predicting commodities-driven real terms GDP growth of 6.2% for this year, but a fiscal deficit of some 10% of GDP, a larger deficit on the balance-of-payments current account and a barely adequate level of foreign-exchange imports coverage.
The country is also experiencing very high consumer price inflation, reaching almost 30% in June on the back of soaring food, energy, housing and utility bills. And the currency – the cedi – depreciated by 20% against the US dollar in the first six months of this year.
Positively, in July, the government embarked on discussions with the IMF to secure a new financing programme.
Augustin Fosu, a contributor to Euromoney’s country risk survey and professor at the University of Ghana’s Institute of Statistical, Social and Economic Research (ISSER), says engagement with the IMF is the best strategy at present.
“It should boost confidence sufficiently to limit portfolio outflows and the drain on foreign currency reserves,” he says.
However, Fosu acknowledges that currency depreciation is a concern as it seems to be continuing, despite engagement with the IMF.
“I suspect that investors remain concerned about the longer-term progress in dealing with the fiscal deficit, as the proposed expenditure reductions entail non-sustainable cuts, such as in the use of vehicles and travels,” he says, adding that “signals for more durable cuts seem lacking”.
One of the direct consequences of these portfolio capital swings, supported by US monetary policy, could be continuing depreciation of the cedi, even if this could be at a slow pace- Moulaye Bamba
Given all that, the substantial fiscal imbalance may lead to possible debt distress, Fosu goes on to warn, especially when the external borrowing required to service the debt is no longer feasible.
Moulaye Bamba, a World Bank Group Africa Fellow, echoes the views of Fosu by noting that the current external shocks from the pandemic and the war in Ukraine are combining with Ghana’s own structural issues – fiscal discipline and an over-reliance on commodity exports – to expose the country to the risks of debt sustainability, economic recession, foreign capital outflows and currency depreciation.
Bamba notes the country’s high external debt burden, inflation and the fact that Ghana is a net import country, meaning the export sector is not sufficiently developed to take advantage of depreciation.
And, as with Fosu, he notes the vulnerability to portfolio outflows, stating he is concerned “the current international context will lead investors to redistribute their money in a more secure place and one of the direct consequences of these portfolio capital swings, supported by US monetary policy, could be continuing depreciation of the cedi, even if this could be at a slow pace”.
In that context, it is understandable that of all the economic risk factors Euromoney’s survey experts are asked to score, the monetary policy/currency stability indicator has been downgraded the most this year.
With Ghana’s debt rating and capital access scores also marked down, it underlines for investors the country’s troubling time.