Ghana Turns to Longer Term Debt After Fitch Cuts Rating

Ghana will sell more longer-term debt to reduce borrowing costs after Fitch Ratings cut the nation’s credit rating yesterday and warned of risks from the public-sector wage bill and rising debt levels.

The government will not be able to meet its budget gap target of 9 percent of gross domestic product this year and will sell more five-year and seven-year bonds to lock in borrowing costs, Deputy Finance Minister George Ricketts-Hagan said by phone yesterday. Fitch cut the nation’s rating to B, on par with Lebanon and the Dominican Republic.

“They are making a conscious effort of reducing debt on the short end of the curve,” Razia Khan, the head of African economic research at Standard Chartered Plc in London, said by phone yesterday. Short-term debt “is more expensive and puts the government in a more precarious position. You will see more longer dated issuance.”

Ghana began reducing subsidies on fuel, water and power and limiting pay increases to government workers to curb a budget deficit that ballooned to 12.1 percent of GDP last year, almost double the target of 6.7 percent. While the government has made progress in reducing the subsidies, it’s still being hampered by the wage bill, which accounts for about 70 percent of tax revenue, Fitch said. Gold prices have dropped 22 percent this year, further curbing earnings for Africa’s second-largest producer of the metal.

Lower Costs

The average interest rate on Ghana’s three-month bonds, used by local banks to determine their own lending rates, has more than doubled since the end of 2011 to 20.446 percent. Ghana sold 100 million cedis ($45.7 million) of seven-year bonds this year, the longest maturity ever at a coupon of 17.5 percent.

“Ghana’s creditworthiness has been further weakened by the government’s failure to fully implement its fiscal consolidation plan in 2013,” Carmen Altenkirch, a London-based Fitch analyst, said in the note. “The authorities continued to overrun on wages, interest costs and arrears.”

Fitch’s analysis is “extremely narrow,” Finance Minister Seth Terkper said by phone after the decision.

“The rating is not fair, it does not reflect our efforts at fiscal consolidation and short and medium adjustments to curb the deficit,” he said. “No country completes adjustment within one year.”

On Track

Last month, Terkper said Ghana was on track to reduce the deficit to 9 percent this year through austerity measures.

The government may fall short of its budget deficit goal this year because of the falling price of gold, Societe Generale SA said in August. Economic growth will slow to 7 percent this year from 8 percent in 2012, according to the International Monetary Fund.

Ghana will probably target a budget gap of 9.5 percent when Terkper presents his new budget later this year, David Cowan, a Citigroup Inc. Africa economist, said in an interview from Johannesburg yesterday.

“It will be a big test for them, because they have to get it down,” he said.

Spending on wages climbed to 72 percent of tax revenue last year, fueled by an 18 percent wage increase for civil servants. The state plans to lower the wage bill to between 30 percent and 35 percent of tax income by 2015.

The Bank of Ghana left the benchmark interest rate unchanged for a second consecutive meeting on Sept. 18 to counter sluggish growth and a weaker cedi, which has dropped 13 percent against the dollar this year. Inflation quickened in September to 11.9 percent, the fastest pace this year, while the currency remained at a record low, boosting the cost of imports.

The cedi fell 0.6 percent to 2.19 per dollar as of 3:39 p.m. in Accra yesterday. The yield on the 2023 dollar bond dropped 3 basis points to 7.87 percent.

To contact the reporters on this story: Ekow Dontoh in Accra at edontoh@bloomberg.net; Moses Mozart Dzawu in Accra at mdzawu@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net

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