TEXT - S&P affirms Ghana's ratings

Wed Nov 21, 2012 10:21am EST

Overview
     -- The Republic of Ghana benefits from strong GDP growth, increasing oil 
production volumes, and a 20-year track record of political stability and 
democracy.
     -- However, the ratings are constrained by high current account deficits 
and a relatively low external reserves position, high government debt stock 
and ongoing fiscal challenges, and low GDP per capita.
     -- We are affirming our 'B/B' long- and short-term foreign and local 
currency sovereign credit ratings on Ghana. 
     -- The stable outlook balances our expectation of resilient GDP growth 
and rising oil-related revenue against persistently large fiscal and external 
financing needs. It also assumes that there will be no significant increase in 
political tensions after the December 2012 elections.

Rating Action
On Nov. 21, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
long-term and 'B' short-term foreign and local currency sovereign credit 
ratings on the Republic of Ghana. The outlook is stable. The transfer and 
convertibility (T&C) assessment is 'B+'.

Rationale
The ratings are constrained by the country's high current account deficits, 
relatively low external reserves position, high government debt stock, and 
ongoing fiscal challenges. The ratings are also constrained by low GDP per 
capita and--despite oil production commencing--a still-narrow economic 
profile. The rating is supported by our view of Ghana's track record of 
political stability and its democracy, strong GDP growth, and strengthening 
oil production volumes (which over the medium term will likely support 
improved fiscal and external balances).

Ghana currently faces vulnerabilities on its external accounts. Despite oil 
production (about 80,000 barrels per day in 2012) starting in 2010, we expect 
the current account will remain in deficit over 2012-2015, at an average of 
around 9% of GDP, because of oil-industry-related imports and general imports. 
Strong import demand, relatively loose monetary policy, high inflation, and 
fiscal expansion in the first half of 2012 led the Ghanaian cedi to fall by 
about 19% against the U.S. dollar. The currency instability also forced the 
central bank to spend about one-fifth of its reserves in an attempt to stem 
the depreciation, highlighting the external vulnerabilities. We estimate that 
gross external financing needs are 110% of current account receipts and usable 
reserves in 2012, while usable reserves are estimated to cover only about 
three months of current account payments.

Ghana's fiscal deficit (on a cash basis) narrowed to 4.4% of GDP in 2011 
(after a deficit of 7.4% in 2010), but we forecast it to widen again to about 
7.0% in 2012. The government adopted a supplementary budget in mid-2012, which 
raised the planned 2012 fiscal deficit target owing to a roll-back in 
electricity prices, wage increases, and arrears repayment. We therefore 
believe that comprehensive fiscal consolidation is still to be demonstrated. 
This is of concern as Ghana's general government debt stock stands at a 
relatively high 41% of GDP. It is possible that the forthcoming elections may 
further erode fiscal discipline; because of how close the elections are likely 
to be, the government may have begun to ramp up spending even further in the 
last few months of this year. In addition, pressure on government spending is 
heightened by intense popular demand to improve public services.

The Multilateral Debt Relief Initiative contributed to a significant reduction 
in the general government debt in 2006, but the public sector has been 
re-leveraging rapidly ever since; general government debt is forecast to reach 
44% of GDP in 2015 (from 26% in 2006). The rise in debt stock would be even 
higher if Ghana had not seen double-digit inflation and strong nominal GDP 
growth of about 20% annually in recent years. 

The emergence of the oil sector, along with good performance in Ghana's other 
key export sectors (such as gold) and dynamic domestic demand should lead to 
real GDP per capita growth averaging a strong 4.9% in 2012-2015 and will help 
contain the rise in fiscal debt ratios in the medium term. Receipts from the 
oil sector should begin to improve fiscal flexibility in the medium term, 
provided that spending can be contained. Ghana has also established 
stabilization and savings funds (which will be allocated 21% and 9% of oil 
revenues, respectively, above an estimated benchmark price). Over the medium 
term, we believe these funds should help cushion the fiscal impact of a 
possible oil price shock. 

The government paid off a substantial portion of arrears owed by state-owned 
Tema Oil Refinery, to Ghana Commercial Bank, a key player in the domestic 
banking sector. In doing so, it stabilized the banking sector. Nonperforming 
loans in the domestic banking sector fell from an estimated 17.6% at end-2010 
to 14.1% in 2011 and have fallen further to 13.1% in March 2012. 

Having introduced multiparty democracy 20 years ago, Ghana is now one of 
Africa's most established democracies, with both major parties having taken a 
turn at relinquishing power after losing elections. While we think the 
elections in December may pose fiscal challenges, we believe the elections 
themselves are likely to go smoothly and in adherence to the constitution.

Outlook
The stable outlook balances our expectation of resilient GDP growth and rising 
oil-related revenue against persistently large fiscal and external financing 
needs. It also assumes that there will be no increase in political tensions 
after the December 2012 elections.

We could consider lowering the ratings if fiscal and external balances 
deteriorate. Downward pressure could also build if growth falters or political 
tensions rise substantially.

Conversely, prudent use of oil revenues, strong growth, renewed fiscal 
consolidation, and continued repayment of arrears could lead us to consider an 
upgrade.

Related Criteria And Research
     -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
     -- Introduction Of Sovereign Recovery Ratings, June 14, 2007
     -- Criteria For Determining Transfer And Convertibility Assessments, May 
18, 2009

Ratings List
Ratings Affirmed

Ghana (Republic of)
 Sovereign Credit Rating                B/Stable/B         
 Transfer & Convertibility Assessment   B+                 
 Senior Unsecured                       B                  
  Recovery Rating                       4
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