* South Africa and Ghana ratings downgraded this year
* Ghana is investor favourite but fiscal ratios are worsening
* South Africa has deeper bond market, higher FX reserves
By Tosin Sulaiman
JOHANNESBURG, Oct 31 One is considered a rising African star, the other has been stuck in the economic doldrums since the global financial crisis - for Ghana and South Africa, investor perceptions could not be more different.
Ghana's brisk economic growth, averaging more than 8 percent over the past five years, political stability and oil discovery in 2007 have raised its profile among investors. Meanwhile, in South Africa, strikes, large twin deficits and the threat of U.S. financial tapering have only added to the negativity this year.
But Ghana's fundamentals look a lot less stellar when compared to Africa's biggest economy, as its recent credit rating downgrade has shown.
The west African country's debt represents around half of its GDP, against 39 percent for South Africa, and the government projects a budget deficit of 9.2 percent of GDP this year, more than double that of South Africa.
Capital imports needed for a growing economy will likely push Ghana's current account deficit to 13 percent of GDP this year, Fitch Ratings says, making South Africa's 6.5 percent shortfall look relatively modest.
South Africa may only be able to muster a 2 percent growth rate, but given Ghana's smaller economy and per capita income that is lower than its similarly rated peers, its metrics are a concern for economists and investors.
With a shallower bond market that is less well known to investors and lacking a solid track record of fiscal discipline, some argue Ghana could be exposed when the U.S. Federal Reserve eventually starts tapering its bond-buying stimulus.
"They have a few levers to pull, but it's a relatively smaller economy and the revenue base is quite narrow," said Mayokun Ajibade, Standard Chartered bank's head of global markets for southern Africa who previously held the same position in west Africa.
"It's growing a lot faster, which is a great plus, but that growth has yet to be transmitted to the rest of the economy."
South Africa and Ghana are among the few sub-Saharan African countries to have their sovereign ratings downgraded this year.
Fitch lowered Ghana's rating to B from B-plus earlier in October, citing a sharp deterioration in government finances. The outlook is stable.
In keeping with a trend of high public spending in election years, Ghana recorded a fiscal deficit of 12 percent of GDP in 2012, up dramatically from its 6.7 percent target, which had itself been revised from 4.8 percent.
The government, which scrapped costly fuel subsidies in May, called Fitch's action unfair. It plans to bring the deficit down to 6 percent by 2015.
South Africa's downgrades reflected a number of factors, including weak growth, a 25 percent unemployment rate, labour unrest and policy uncertainty ahead of elections in 2014.
Although foreign holdings of domestic debt are higher in South Africa at around 38 percent, compared to Ghana at 26 percent, the latter is at greater risk to Fed tapering given its lower foreign exchange reserves and a less developed bond market, said Carmen Altenkirch of Fitch.
With reserves at three months of import cover, compared to 3.9 for South Africa, the risk of a sharp depreciation in Ghana's exchange rate is higher, she said. The cedi has depreciated more than 15 percent this year versus 17 percent for the rand.
Another important difference is that South Africa is included in a number of foreign bond indices so there is a steady pool of investors who have to hold its bonds, she added.
"What South Africa also has compared with Ghana is a long track record of fiscal credibility," said Altenkirch. "When push comes to shove, once Fed tapering starts and as it gains momentum I think investors are more likely to buy the South African fiscal story compared with Ghana."
Although most of its debt is in local currency, Ghana's increasing dollar-denominated debt has not gone unnoticed. It issued a second $750 million Eurobond in July and plans a $1 billion global bond next year. But unless it can tame its deficits investors will be wary.
"There's only so much money anyone will be willing to lend to somebody that likes to spend too much," said one investor, who declined to be named. "They shouldn't overestimate the international investor community's patience."
For now, one thing Ghana does have in its favour is positive sentiment, said Standard Chartered's Ajibade.
"South Africa is shrouded by a lot of negative sentiment," he said. "On the other hand, when you look at Ghana for some reason the sentiment is still pretty positive. They're the darling of investors." (Reporting by Tosin Sulaiman; Editing by Ed Stoddard and)