Fitch Ratings, the international rating agency, has today upgraded the Republic of Ghana's Long-term foreign and local currency ratings to 'B+' from 'B'. Following the upgrade, the Outlook is now Stable. The Country Ceiling has also been upgraded to 'B+'. The Short-term foreign currency rating is affirmed at 'B'.
"This upgrade reflects three factors: the impact of extensive external debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative; maintenance of macroeconomic stability throughout the 2004 electoral cycle; and the more recent deregulation of domestic fuel prices," says Paul Rawkins, Senior Director in Fitch's Sovereign team. Peer comparators at this rating level are Cape Verde, Uruguay and Venezuela.
Fitch notes that for the first time since the restoration of democracy in 1992, Ghana has shown that it can successfully navigate an election cycle without compromising macroeconomic policy management. Elections in December returned incumbent president Kufour for a second and final four-year term, while his New Patriotic Party secured an increased majority in parliament, giving him a new mandate to press ahead with reform. Data subsequently published with the 2005 budget indicate that although public finances suffered some slippage in 2004 - largely due to soaring domestic fuel prices - relative to 2003 the deterioration was slight, while growth touched a 26-year high of 5.8% and inflation declined to 13%.
"The upgrade of Ghana's sovereign ratings to 'B+' signals to investors that a newly re-elected Kufour administration has wasted no time in reaffirming its reformist credentials and setting Ghana firmly on the road to fiscal consolidation," Mr. Rawkins says. "The favourable macroeconomic outlook and the improving trend of Ghana's public and external solvency ratios have been important factors in the current rating upgrade. Future upgrades will depend to a large extent on how well Ghana builds on this foundation for growth."
The 2005 budget, announced at end-February, sets out a progressive reform agenda, heralded by the immediate deregulation of domestic fuel prices, thereby eliminating most subsidies and conforming to a key structural reform benchmark under Ghana's current IMF programme. With domestic revenue set to rise to an impressive 25% of GDP and grant aid being maintained at close to 6% of GDP, the central government deficit should be reined in to 1.4% of GDP this year from 2.9% in 2004.
Thanks to HIPC debt relief and the domestic policy discipline that it has instilled, Ghana's net external debt ratio has converged to the 'B' median, while public debt is expected to follow suit by 2006. At the beginning of the HIPC process in 2000, net external debt stood at 200% of current external receipts (CXR), while public debt had risen to 160% of GDP. These ratios have since subsided to 96% of CXR and 82% of GDP respectively as at end-2004. Meanwhile, much reduced external debt service demands have fed through to a very comfortable international liquidity ratio of more than 200%.
Nevertheless, as a low-income and still rather indebted country, Ghana remains vulnerable to external shocks, while efforts to diversify the economy have met with only limited success: mining and agriculture still generate more 40% of national income, 60% of employment and 70% of export receipts. Past structural adjustment programmes have not been very effective. However, the current blueprint for reform - the IMF/World Bank-backed Ghana Poverty Reduction Strategy - offers more cause for optimism, not least because it is much better resourced both technically and financially. Thus, higher inflows of aid should underpin a significant rise in public investment by 2006. This assistance will also be essential to fund a projected deterioration in the current account deficit and help build up its international reserves further.