Dangerously high debt burden
It is thus highly unlikely that the authorities will meet their fiscal targets in the short and medium term, unless they are forced to comply. We expect a higher budget deficit than the government’s forecasts (9.4% of GDP in 2022, 8% in 2023; chart 2), which means the debt ratios will continue to deteriorate, at least for the next two years. At 84% of GDP at year-end 2023, public debt would swell to dangerously high levels. Moreover, its structure makes it vulnerable to multiple shocks, such as a sharper than expected growth slowdown in the emerging countries, especially in China, or the tightening of US monetary policy.
At mid-2021, non-resident investors held nearly 20% of domestic debt, the equivalent of USD 5.8 bn, compared to foreign reserves of less than USD 9 bn. As a result, despite a moderate current account deficit and an export base whose price trends are rarely synchronised (gold accounted for 47% of exports in 2020, oil for 20% and cacao for 16%), Ghana is still exposed to major capital outflows with potentially strong pressures on the exchange rate. In addition, nearly half of its public debt is denominated in foreign currency; the debt ratio automatically increases by 4 points of GDP with every 10% depreciation of the cedi.
The deterioration in external financing conditions would not be limited to pressures on external liquidity. The government plans to cover 80% of its financing needs on the domestic market. But with total bank assets accounting for 40% of GDP, the financial market is rather small. Moreover, banks are already rather highly exposed to sovereign risk. At the end of June 2021, government loans outstanding accounted for 46.5% of banking system assets, compared to 37.5% at year-end 2019. In the absence of an alternative to funding from the international market, the authorities may have to turn to the central bank again. In 2020, a monetisation programme equivalent to 2.6% of GDP helped cover a quarter of the government’s domestic financing needs. However, the central bank’s policy rate increase in November seems to indicate that monetary stability is being given priority again. It also risks increasing even more the already very expensive cost of government borrowing. Treasury bond rates fluctuate between 16% and 19% for maturities of 1 to 3 years. Interest payments already absorb nearly half of fiscal resources, 80% of which is for locally-issued debt instruments. The government’s manoeuvring room is all the narrower since it must refinance 42% of the domestic debt over the next three years. Fortunately, the next major Eurobond does not mature before 2025.
Economic growth is bound to slow
So far, economic activity has held up fairly well. The economy managed to escape recession in 2020, and the figures for the first 9 months of 2021 were surprisingly favourable, with average growth of 5.3%, thanks to a strong rebound in the services sector. The government’s forecast of 4.4% made as part of its budget presentation is likely to be exceeded.
In contrast, the official 2022 growth forecast of 5.8% seems to be extremely optimistic. We rather expect economic growth to slow to 4.7% due to the tightening of financing conditions and monetary policy. The authorities are notably calling for a 29% increase in public investment in 2022. However, it is highly probable that the latter will serve as an adjustment variable. Another constraint stems from the persistence of major fiscal deficits.
In the banking sector, the loan-to-deposit ratio has fallen to a historically low level of 52%, nearly 10 points less than at year-end 2019. In a fragile economic environment, Ghana’s banks will tend to favour the safer government securities. Yet with a non-performing loan ratio of 16.4% in November (14.3% at year-end 2019), credit risk is high. Moreover, the tightening of monetary policy will continue to deteriorate lending conditions and will further strain the growth of bank lending to the private sector, which was already negative in real terms at the end of November (-0.8%).
Looking beyond Ghana’s economic growth momentum, the main source of concern is the risk of a new episode of macro-financial stress. In 2015, after the cedi had declined by nearly 50% against the USD in two years, the authorities decided to sign a funding agreement with the IMF. For the moment, the authorities do not think they will need to call on this assistance, but the warning signals are multiplying.
