Investors Seek Reassurance on Debt from Ghana’s 2022 Budget

(Bloomberg) -- Ghanaian Finance Minister Ken Ofori-Atta will look to allay investor concerns about the nation’s debt sustainability and sluggish economic growth in his budget speech on Wednesday.

These charts show the key issues the 62-year-old former investment banker will need to address as investors hope Ghana will show credible plans to reduce the fiscal deficit, wasteful expenditure and debt.

Investors are concerned about Ghana’s ability to service its loans with the average extra premium sought on dollar securities sold by the government now close to distressed levels. The general government interest expense is projected by Fitch Ratings to increase to almost 47% of revenue next year, well above the median of 11% for nations with a similar investment grade.

“Rarely do countries sustain such high interest burdens for any length of time without a crisis, an International Monetary Fund rescue, or default/restructuring,” Stuart Culverhouse, head of sovereign and fixed income research at Tellimer Research, said in an Oct. 22 note.

The government has shown fiscal discipline before. Ghana cut its budget deficit to 3.8% of GDP in 2018, from 8.7% in 2016, after President Nana Akufo-Addo’s government passed legislation to cap the shortfall at 5%. The Ministry of Finance sees the fiscal deficit at 9.4% of GDP in 2021, compared with 11.7% last year.

“Without any material expenditure compressions, our forecasts show the budget deficit improving only moderately to -11%, -9.4% and -7.7% in 2022, 2023 and 2024, respectively,” Deutsche Bank Economist Danelee Masia said in a note. That would mean the government would miss its target of reducing the fiscal deficit to below 5% of GDP by 2024, after breaching it last year. 

Key to trimming its liabilities will be improving economic growth. “We can grow ourselves out of the debt, but unfortunately if we do not get strong growth then debt-sustainability issues will become key,” Bank of Ghana Governor Ernest Addison said last month. “It’s a serious consideration everybody should be concerned about.”

The budget will need to set out how the government plans to boost economic growth. The Ministry of Finance’s estimate for growth in 2021 is 5%, while the presidency is predicting 4.6%. Economists including Masia and Oxford Economics Africa’s Leeuwner Esterhuysen are forecasting an expansion of 2.3% to 4.5% after a slower-than-anticipated recovery in the first half of the year.

Improved growth will also help lift revenue that undershot forecasts by 12% in the first seven months of the year, fueling concerns about whether or not the country will be able to meet its debt obligations.

Ghana faces a major challenge in collecting revenue, something it’s trying to address with a digitized system. The nation’s tax-to-GDP ratio is forecast at 12.9% this year, compared with 24% in a peer country such as South Africa for 2021-22 and 40% among high-income nations. The budget will need to outline measures to change this.

Ofori-Atta may announce a review of the government’s 3% tax on gold exports. Since its introduction in May last year, the levy has spurred an increase in gold smuggling from small mines, which extract a third of output in Africa’s biggest producer of the metal.

©2021 Bloomberg L.P.