Ghana's credit rating moment
Since November 2021, Ghanaian authorities have been campaigning to extend control over the public financial management situation and its surrounding narrative. The second part has become an acute concern these past two weeks following downgrades by rating agencies, Fitch and Moody’s, which are already impacting capital markets.
Moody’s Ghana rating Caa1 (poor standing) is now one step below that of Fitch and S&P Global, which both have Ghana on B- (speculative) and has attracted particular alarm. The Ministry of Finance is arguing publicly and vociferously against the Moody’s decision on the basis that: (a) it does not take sufficient note of fiscal consolidation measures in the 2022 budget, (b) that the suggestion of weakened institutional strength is bogus, and (c) Moody’s analysis is shallow and desktop-based since the lead analyst has spent little time in the country. That view has been echoed by the African Union’s African Peer Review Mechanism (APRM) panel, which urged Moody’s to “review the appeal by the government of Ghana against an inaccurate credit downgrade”.
For those in the region seeking access to international capital, it is strategically important that the issuance of downgrades carry costs for the rating agencies themselves – costs high enough to cause pause when pause is warranted. Even so, there are more fundamental issues shaping Ghanaian economic security. Addressing them will impact sovereign risk, perception of the same, and opportunities for the domestic private sector and international investors.
The emphasis in the public discourse here has been on (a) the e-levy, (b) 20% cuts in expenditure, (c) IMF article IV, and (d) an imagined IMF programme[2] or support instrument. But there are three cross-cutting issues with potential to move the dial.
1. Political decision making
At the start of the current government’s second term, we wrote that “your typical Ghana governance wish list has three items on it: (1) consistency across the political cycle rather stop-start on projects as governments change, (2) decentralisation of political authority, and (3) that parliament stops acting as a rubber stamp. One hopes that this parliament addresses the third without going to another extreme”.
That bar has not yet been passed. Since November, the government has struggled to pass the digital transactions tax (“e-levy”) on which so much of its revenue mobilisation plan lies. It is a hard and unwelcome thing on the street. But the legislative process is ongoing[1]. And if the 137-seat ruling New Patriotic Party (NPP), 1 independent and 137-seat National Democratic Congress (NDC) opposition can effect a meaningful bill, and implement it, that would constitute a noteworthy risk positive development.
2. Divestiture
Operational and financial performance among state owned enterprises (SOEs) has been highlighted critically at points by the current administration. The 2021 Auditor General’s report assessed total irregularities at the SOEs to be USD918 million, 78% of which were designated as outstanding debtors/loans recoverable. Divestiture could be a part of the strategy for drawing the private sector in, addressing standards, redrawing the government’s liabilities and exerting additional influence over the narrative in international markets. To that end, in the 2022 budget, the Finance Minister signalled that it is still considering “privatisation of the retail component of the electricity distribution business”. And this month, the Minister of Public Enterprises Joseph Cudjoe was quoted in the press stating the government is seeking strategic investors for the Tema Oil Refinery.
3. Tax exemptions
Rationalisation of tax exemptions has been a stated policy objective for Ghanaian government for decades. There is a bill that has been in parliament since 2019 but is yet to become law. In the 2022 budget, the government states its intention to pass and implement it at some point this year – however again, the substantive and aesthetic of Ghana public financial management situation make this an immediate concern.
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[1] This includes the NPP attempting to win support via townhalls and ensure full NPP parliamentary attendance and support for the bill. Cross-party compromise is the stretch goal.
[2] An idea the government currently opposes.
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