Ghana’s trials have been muddling through over the first half of 2014. The country’s problematic double digit deficits – on the fiscal and current account balance – have been necessitating high levels of borrowing and put depreciating pressure on the local currency (cedi). In order to cut back on current spending and relieve some pressure of the cedi, the government recently took several bold yet unpopular measures. The Ghanaian government partially removed fuel subsidies in July 2014 (after the 2013 suspension was  reversed to cushion the rising cost of living) which drastically raised fuel prices. In conjunction with increased taxes on small businesses and erratic electricity and water supply, the burden on the population is growing and causes discontent. Moreover, in response to the government’s reduced purchase price and production target of cocoa, the cocoa sector has recently threatened to mobilise 200,000 farmers in a  protest action. And finally, 2,000 workers took to the streets on 24 July to demonstrate against the suspended fuel subsidies and for demanding action against the falling cedi.

Impact on country risk

For 2014 Ghana got stuck with large deficits and mounting public debts, while growth started slowing down and pressure on the cedi persisted. As a result, inflation (15%) is pushing up the cost of living and fuel, raising public dissatisfaction. The risk for payment delays to government contractors remains high due to   the large fiscal gap and heavy short-term debt services; however the partial removal of fuel subsidies could mitigate this risk to a certain degree as subsidies were said to cost the government USD 48 million every month (8% of revenues). Henceforth, the government should demonstrate continued boldness in countering unduly current spending (public wage bill) and strengthen revenue collection in order to rebuild payment capacity and bring relief to the cedi. Nonetheless, it is likely for local currency depreciation to continue as long as weak gold prices and disappointing oil and cocoa output keep quelling export revenues. The final turnaround might only take place when new oil fields come on stream as of 2016. Still for now, the Ghanaian government will be faced with more protests and strikes that are expected to grow in size and frequency as  a reaction to spending cuts. Nevertheless, besides the risk for vandalism in the event of rioting, we do  expect Ghana’s strong democratic credentials to assist in the maintenance of overall stability and the peaceful course of most demonstrations.

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com