* South Africa and Ghana ratings downgraded this year
* Ghana is investor favourite but fiscal ratios are
* 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
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
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)