In August 2014, Ghana entered negotiations with the IMF to help break its downward spiral. The September USD 1 billion Eurobond and USD 1.8 billion short-term ‘Cocoa Board’ loan gave Ghana liquidity leverage and allowed the country to linger over negotiations and wager on certain requirements. Eventually, an IMF bailout remained ineluctable to address adverse debt dynamics and rebuild macroeconomic stability. Consequently, negotiators landed in February 2015 on a 3-year IMF Extended Credit Facility Agreement (ECF). This has been approved by IMF Management and the Executive Board, which means this bailout fund worth USD 918 million will help mitigate the balance of payments risk in the near term by providing shares of liquidity conditional on serious reforms and policy efforts, mainly spending cuts, tax increases and restraint on the public wage bill.

Impact on country risk

Economic growth is estimated to fall to 3.5% in 2015 as a consequence of fiscal consolidation alongside a raging energy crisis crippling domestic activity. Over the past three years, fiscal metrics have been deteriorating quite rapidly on the back of laxity and overspending. Consequently, the budget deficit is expected to reach 7.5% of GDP in 2015 and government debt would increase further, bearing in mind that HIPC debt relief was obtained only eight years ago. With regard to Ghana’s external position, the current account deficit obviously worsened, fraught with the fiscal side and a commodity price crunch (gold and oil in particular) along with a gloomy global environment. Capital inflows and FDIs have been moderating, leading to a further contraction of foreign exchange reserves that nevertheless managed to reach 3 months of import cover by end 2014 thanks to the Eurobond and short-term loan issuance. The run on the cedi caused the local currency to lose 31% against the USD in 2014 and together with monetary financing of the budget, resulted into soaring inflation. Fresh liquidity comes along with the IMF programme and intended reforms could restore confidence. However, it was very likely for Ghana to miss IMF targets, as profound investments were required to counter the energy crisis. In addition, general elections - planned for 2016 - traditionally coincide with a loss of fiscal discipline. Besides, as the large twin deficit is not expected to be curbed easily, the risk for currency volatility remains. Moreover, high domestic interest rates of around 26% and less favourable external borrowing terms uphold the roll-over risk, especially in 2016-2017 when huge maturities are due. What is more, the depreciation of the cedi has increased the costs of servicing the debt denominated in hard currency, thereby supporting the assessment of a continuing high risk for debt distress.

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