Standard and Poor's, an international financial ratings agency, has said Ghana's ratings could go up if progress were made on structural reform, especially privatization or in broadening the narrow base of the economy which relied heavily on donor inflows.
“A reduction in the current deficit and evidence that the financing of deficits was not undermining debt sustainability would augur well for the rating,” Mr Konrad Reuss, Deputy Head of Sovereigns and International Public Finance of S&P, told the GNA in Singapore.
“Conversely, any indication that the greater fiscal flexibility afforded by debt forgiveness was being misdirected, or that Ghana was embarking on policies that endangered relations within donors would affect the prospects for better ratings.”
The interview on the sidelines of the just-ended International Monetary Fund and the World Bank meetings also examined the impact of S&P in assessing the Ghanaian economy, what the ratings held in store for the country and how independent the inputs used in making judgments for ratings were.
Giving the outlook for Ghana's rating fixed at B+, Mr Reuss said if Ghana were to backtrack on reforms, especially regarding the recent free operation of the fuel pricing mechanism, it could put a downward pressure on the ratings.
Mr Reuss explained the rationale behind the ratings as supported by the entrenchment of macro-economic and political stability and the easing of external and fiscal pressures following debt relief under the Multilateral Debt Relief Initiative (MDRI).
The sixth edition of S&P's Rating Services publication released at the 2006 IMF/World Bank meetings in Singapore last week, commended Ghana for establishing and maintaining her political institutions, a stable currency and robust economic performance.
“Fiscal performance has been robust, with timely deregulation of oil prices in February 2005, helping to limit the 2005 Central Government deficit to 2.3 per cent of GDP.”
The publication includes summary analyses of all 15 sovereigns in Africa, with Kenya being the latest country to join.
Following the decision of the African Development Bank, IMF and the World Bank to write off 3.2 billion dollars of Ghana's debt; Central Government external debt is projected to fall to 13 per cent of GDP in 2006 from the 59 per cent in the previous year, Mr Kwadwo Baah-Wiredu, Minister of Finance and Economic Planning, noted.
He stressed that the country had moved from two weeks foreign exchange cover to about four months cover, “a significant trend that places the country in good stead to attract investment and capital for infrastructure development especially”.
Sovereign ratings are based on public sector external debt; GDP growth; general government balance; economic and political risk; fiscal situation; monetary situation and external debt situation.
The S&P publication said the widespread confidence in Ghana's stability was most vividly illustrated by the ongoing increase in annual remittances of two billion dollars representing the growing source of foreign capital inflows.
It was, however, noted that constraint on the economy hinged on the continued dominance of cocoa and gold, resulting in the country's susceptibility to the volatile commodity prices and low or inconsistent agricultural output volumes.
It attributed the high oil prices and reduced cocoa output in 2005 resulting in an increase of the current account deficit to 7.7 per cent of GDP from 3.2 per cent in 2004 with inflation, which dipped briefly into single digit in early 2006, rising on the back of further oil price increases.
Mr Reuss said Ghana was burdened by a combination of high development needs, reflected in GDP per capita of 476 dollars in 2005, and a limited fiscal base. This was demonstrated by a 2005 general government deficit excluding grants of 7.7 per cent of GDP.
“This combination implies that Ghana's fiscal accounts will remain reliant on donor inflows for several years to come. But the debt reduction offered by the MDRI will help to improve fiscal flexibility, and given that the debt forgiven was highly concessional in any case, the benefits beyond 2006 are unlikely to exceed 100 million dollars debt service per year,” he said.
He indicated though that the decline in debt levels is the result of forgiveness rather than fundamental improvement to the national economy; future external funding needs must increasingly be met by non-debt sources such as foreign direct investment and remittances to ensure that the breathing space offered by debt forgiveness was not short-lived.
Mr Ruess cautioned the Government on its decision to raise funds from the international capital market, describing it as a sound step. “Yet this must be done with a lot of prudence in the process and meticulousness.”
He asked the Government to keep the books well and not allow any extra slippages which could bring the work done so far to naught.
On the point that S&P was in cahoots with the Government to tell good stories about it (government), he said S&P was an international organization with a huge reputation to keep.
“If we find something wrong in the economic management of the country, we would not hesitate to make it known, and this would no doubt have a reflection on the outcome of the ratings in the future.”
Projections by S&P put per capita income at 519 dollars at the end of this year and 557 dollars for 2007. Real GDP outlook would be marginal from 5.9 per cent to 6.0 per cent from 2006 to 2008.
“Sovereign credit ratings are an important means for African governments to show both private investors and international community that they remained committed to responsible, predictable and transparent economic policies,” Mr Ruess said.