RPT-Fitch: Ghana budget fiscal aims limited, overshoots still likely

Mon Nov 25, 2013 6:38am EST

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Nov 25 (Reuters) - (The following statement was released by the rating agency)

Ghana's 2014 budget released last week November 19 aims for a very limited fiscal correction following slower-than-anticipated consolidation this year, Fitch Ratings says. We do not think it will effectively address the deterioration in government finances over the past two years that has substantially eroded Ghana's creditworthiness.

Slower fiscal consolidation than the authorities had anticipated in the first nine months of 2013, and the consequent risk of fiscal slippage, was a key driver of our downgrade of Ghana's sovereign rating to 'B' from 'B+' in October.

The 2014 budget targets a deficit of 8.5% of GDP, following an upward revision of the 2013 deficit to 10.2% against a target of 9% at the time of the previous budget. The budget also pushes back a year (until 2016) the target deficit of 6% of GDP . We maintain our view that the pace of fiscal consolidation over the next two years will be slower than the government projects, with Fitch forecasting a deficit slightly above 9% for 2014.

This reflects a divergence in views on the government's capacity to significantly expand the revenue base as a percentage of GDP, given persistent shortfalls in revenue collections over the past two years. The authorities expect revenue to be 7.7% below target in 2013.

Containing current expenditure and dealing effectively with arrears will continue to be a challenge for the authorities in 2014, given trends seen in 2013. Although total expenditure is 6.6% lower than forecast for the year to September, wages and interest - two areas where overruns have been persistent - were respectively 5.5% and 39.5% higher than budgeted. Arrears for the first nine months of the year are 19.2% above target.

The announcement earlier this year, that fuel subsidies were scrapped and electricity prices would rise by 79%, reduced an important source of budget overruns. However, the decision to scale back the electricity price increase, by 25%, highlights the challenges the authorities face in implementing unpopular measures that would help bring the deficit back under control. The further build-up in arrears highlights continued challenges with public sector financial management despite commitments to substantially reform the system.

Successive years of large budget deficits have put pressure on public debt, which has risen to 52% of GDP in September 2013, from 38.3% in 2011 and 31% of GDP at the time of the 2008 elections and above similarly rated countries ('B' median, 38.2% of GDP). Fitch forecasts that debt will rise to 54% of GDP by the end of 2014.

Policy credibility has been significantly weakened following two years of larger-than-expected budget deficits. Risks remain to the medium-term fiscal outlook, including persistently high bond yields, and continued arrears build-up, as well as utility subsidies.

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