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Another One Bites the Dust: Ghana’s Gaffes
Following its return to democracy in the early 1990s, investors began to show renewed optimism for Ghana as a pacesetter in the region. In ensuing years, the country was a beneficiary of the heavily indebted poor countries (HIPC) initiative that saw a successful reduction of its public debt from approximately 80% of its GDP in 2000 to around 20% in 2004, putting the country on a positive trajectory. Instead of taking advantage of a clean slate, Ghana’s post-HIPC history has included widening deficits, the abandonment of a disciplined fiscal framework at the onset of Covid-19 and rising core rates as of late. Markets have punished Ghana and given an increasingly unsustainable debt load, Ghana is unable to access external financing sources. Public debt is projected to reach about 100% of GDP by the end of 2022.
Under pressure
Ghana’s current economic malaise is primarily the product of self-destructive policy choices that significantly increased the country’s vulnerability to negative macroeconomic shocks. In stark contrast, Angola, another oil-producing nation, capitalized on reforms and high oil prices to drive its own debt-to-GDP ratio down from more than 130% in 2020 to a less than 60% projection for 2022. Conversely, net FX reserves in Ghana, a good indication of actual usable reserves, are now so depleted that they can cover just over one month of prospective imports. Moreover, Moody’s recently downgraded Ghana’s sovereign credit rating from Caa2 to Ca (one notch above default). In November ’22, year over year inflation surpassed 50% and the country’s currency, the cedi, has lost about 30% of its value versus the dollar since the beginning of 2022.
The show must go on
Ghana recently passed its 2023 budget and also launched a voluntary domestic debt exchange offer in a bid to reduce its now unsustainable debt service burden and gross financing needs. While the proposal envisions no haircuts on domestic principal, average interest costs are essentially being halved. So far, the response from domestic financial institutions has been negative, and the government will likely need a carrot and stick approach to maximize participation in its offer. On a high note, Ghana reached a staff level agreement for a $3 billion loan with the IMF, with approval dependent upon the country’s restructuring of its debt with creditors. This is Ghana’s 17th lifeline from the IMF since the late 1960s, despite President Nana Akufo-Addo’s prior campaign on a “Ghana Beyond Aid” platform, not to be confused with the Band-Aid approach occurring at present.
I want to break free
Can Ghana break the cycle of kicking the “fiscal” can down the road? We perceive Ghana’s 2023 budget to be the same old song, sung in a different tune, with its revenue-centric consolidation approach as opposed to meaningful cuts to non-interest current expenditures. While we appreciate the lyrical efforts made to reach the staff level agreement with the IMF, the current ruling party faces an uphill battle entering the 2024 election cycle that will increasingly influence decision making and spending over the next two years.
We will be watching the outcome of the country’s domestic debt exchange closely as it may set an important precedent for its regional peers.
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