{"id":155181,"date":"2015-09-28T05:30:50","date_gmt":"2015-09-28T05:30:50","guid":{"rendered":"http:\/\/4cd.e16.myftpupload.com\/?p=155181"},"modified":"2015-09-28T04:18:53","modified_gmt":"2015-09-28T04:18:53","slug":"sovereign-credit-rating-implications-for-ghanas-4th-eurobond","status":"publish","type":"post","link":"https:\/\/citifmonline.com\/2015\/09\/sovereign-credit-rating-implications-for-ghanas-4th-eurobond\/","title":{"rendered":"Sovereign credit rating: Implications for Ghana\u2019s 4th Eurobond"},"content":{"rendered":"

 <\/p>\n

Overview<\/strong><\/p>\n

Fitch Rating, the international rating agency headquartered in New York has assigned a speculative-grade credit risk status to Ghana\u2019s local and foreign currency debt instruments. The \u201cB\u201d Issuer Default Rating (IDR) with negative outlook, sends strong signals to the investor community about Ghana\u2019s high credit risk associated with sovereign debt issuance, who may demand higher yield before parting ways with investment capital. This opinion piece analyzes the implications for Ghana\u2019s imminent sovereign debt issue and makes policy recommendations to address downside risks.<\/p>\n

The Rating – Basis of Opinion<\/strong><\/p>\n

    \n
  1. Fitch uses an ordinal ranking system to grade sovereign and\/or corporate liabilities into two categories; investment grade (signifying low-to-medium risk) and speculative-grade (signifying high risk) issues. Fitch bases its rating opinion on the interplay and impact of the following variables on an issuer\u2019s capacity to meet liability commitments as per the terms and conditions of the issue contained in the prospectus. In terms of Ghana\u2019s rating, the following variables (para. 2-8) formed the basis of Fitch\u2019s \u201cB\u201d rating:<\/li>\n<\/ol>\n
      \n
    1. Ghana\u2019s fiscal performance under the 3-year IMF-sponsored economic recovery has yielded positive outcomes for H1 2015. Fiscal deficit for period under review (H1 2015) is 3% of GDP compared to program target of 4%.<\/li>\n
    2. Real sector growth year-on-year saw GDP grow by 4.7% in Q1 2015 compared to a negative growth of 3.8% in Q1 2014. This was driven broadly by strong growth in Agriculture (7.4%) and Services 4.7%. This notwithstanding, the economy is expected to grow at 3.1% in 2015, reaching 6% in 2017, according Fitch.<\/li>\n
    3. Inflation and inflation expectations remain elevated as headline CPI reached a peak of 17.9% in August 2015 from 16.4% in January. This was driven mainly by the non-food category due to utility price hikes and pass-through effects of cedi depreciation against major trading currency.<\/li>\n
    4. On the monetary front, Narrow Money (M1: currency in circulation and demand deposits) experienced a slowed growth from 24.9% in January 2015 to 13.5% in July 2015. This may be exerting further inflationary pressure due to the increased demand for transaction balance.<\/li>\n
    5. On the external from, trade deficit worsened from $3m in H1 2014 to $1.5b in H1 2015. This was driven by lower export receipts of $6.3b in H12015 compared to $8.1b in same period 2014 while import expense was $7.8b down from $8.4b in H1 2014. Fortunately, flows through the country\u2019s Service and Income Accounts compensated for the poor Merchandize Trade Account performance to improve overall Current Account position.<\/li>\n
    6. Gross Foreign Asset (GFA) declined from $5.5b (3.8 months of import cover) in Dec. 2014 to $4.4 (2.8 months of import cover).<\/li>\n<\/ol>\n
      \"SAMSUNG<\/a>
      SAMSUNG CSC<\/figcaption><\/figure>\n

      Risk to Growth Outlook<\/strong><\/p>\n

        \n
      1. Concerns about possible reversal of fiscal consolidation policies and program are heightened as Ghana nears a very competitive election in 2016. Even though this downside risk remain elevated, Ghana\u2019s commitment under the IMF 3-year Extended Credit Facility ties the country\u2019s fiscal managers down to very limited options. Albeit there will be pressure to spend on non-budgeted commitments that fall outside the priority schedule, Metis Decisions foresee an equal counter-pressure from Washington and some Civil Society Organisations to maintain fiscal discipline.<\/li>\n
      2. The energy crises also remain a key downside risk to growth outlook. Reliable and consistent flow of gas to power thermal and hydro-electric plants would help ease the pressure on currency markets.<\/li>\n
      3. Escalating Debt\/GDP dynamics poses tremendous risk particularly when foreign denominated liabilities had reached 62% of total debt stock, as at July 2015.<\/li>\n
      4. Notwithstanding the policy-based guarantee by World Bank ($400m) and expected inflows from Cocobod\u2019s receivables-backed trade facility, vulnerable external sector pose a downside risk to currency stability.<\/li>\n<\/ol>\n

        Implications for Fourth Eurobond<\/strong><\/p>\n

          \n
        1. Speculative-grade assets from sub-Saharan sovereign debt issuers are increasingly becoming costly as investor appetite for such instruments become bearish. In 2014, Ghana issued its 3rd<\/sup> Eurobond at 8% coupon rate with maturity in 2026 (final principal repayment). This debt instrument is currently trading on the secondary market at 9.5%. This development provide a basis to project that subsequent yields may be issued at par or premium to this this rate, should the issue occur within Q3\/Q4 2015.<\/li>\n
        2. Zambia\u2019s current issue (July 2015) of $1.25b at 9.375% suggests bearish investor sentiments towards Frontier Market debts, which may impact negatively on funding cost for subsequent issuers like Ghana.<\/li>\n
        3. Despite the high credit risk profile of Ghana\u2019s sovereign issuance, sub-Saharan Africa remains a preferred destination for global investment capital due to relatively high regional growth forecast and high asset yields. This may bode well for the order book size of Ghana\u2019s upcoming Eurobond issue.<\/li>\n<\/ol>\n

          Conclusions and Recommendations<\/strong><\/p>\n

            \n
          1. Ghana\u2019s high credit risk profile (speculative grade \u201cB\u201d) with negative outlook, reflects the economy\u2019s weak external payment position and vulnerable fiscal and growth outlook.<\/li>\n
          2. High debt\/GDP ratio and possible policy reversals during 2016 elections are strong downside risks to watch.<\/li>\n
          3. Bearish investor appetite for new frontier market debt raises concerns about potential order book size and funding cost (yield) for Ghana\u2019s imminent Eurobond issue.<\/li>\n
          4. Issuance that are deployed towards deficit financing as opposed to investment in infrastructure tend to command high yields. Government may have to be strategic in its deal-structuring and subsequently its communication of same, while on pre-issue promotional tour (road show).<\/li>\n
          5. Government must stay on course in terms of its commitment to fiscal consolidation.<\/li>\n<\/ol>\n

            –<\/p>\n

            The author is a director of Metis Decisions LLC, a management consulting company in Ghana. He is also a motivational speaker, author and a personal development coach.<\/p>\n

            Email: nkunimdini.asante@metisdecisions.com<\/p>\n","protected":false},"excerpt":{"rendered":"

              Overview Fitch Rating, the international rating agency headquartered in New York has assigned a speculative-grade credit risk status to Ghana\u2019s local and foreign currency debt instruments. The \u201cB\u201d Issuer Default Rating (IDR) with negative outlook, sends strong signals to the investor community about Ghana\u2019s high credit risk associated with sovereign debt issuance, who may […]<\/p>\n","protected":false},"author":27,"featured_media":137098,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[8,38,21,4],"yoast_head":"\nSovereign credit rating: Implications for Ghana\u2019s 4th Eurobond - Citi 97.3 FM - Relevant Radio. 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