Ghana's inaugural $3.28 sovereign bond, issued in 2007, was a huge hit with foreign investors from across the globe eager to invest in the commodity-rich West African nation and encouraged by its sustained macroeconomic stability.
Fast forward to today, however, and Ghana, which held elections in December, is in the news for serious fiscal slippage. Fitch Ratings revised its outlook to negative on B-plus-rated Ghana, citing the severe deterioration in the country's fiscal deficit to 12.1%, the funding of that deficit through high-interest borrowing on the local market, and the escalation of government debt to 47% of GDP from 31% in 2008.
"Ghana has a history of sharply increasing the budget deficit during election years," said Carmen Altenkirch, the primary analyst covering Ghana at Fitch Ratings. "They had a very successful bond issue in 2007, but then in 2008, the budget deficit rose really high, only to be pulled back again the following year. We saw the same trend in 2012, so that in itself is concerning. But what's more concerning is that they are funding the deficit in excess of rates of 20% in an environment where the inflation rate is 10%."
Of course, one of the main reasons Ghana can afford to run such large deficits is because nominal GDP continues to grow at the rapid rate of 20%. Ghana's oil and gold exports continue to bolster the economy, Altenkirch said. Both oil and gold production are optimally managed by the government, and exports of gold, cocoa and oil, which together make up 83% of exports, will help in eventually reducing the deficit and bringing the debt level back in line.
"In general, Ghana conducts macroeconomic policy very prudently," Altenkirch said. "It has a favorable investment climate and a long history of political stability, so the fact the country keeps getting into trouble with the deficit is a concern for us, and it would be better over all if they managed the public finances better in order to avoid the adjustment costs they're experiencing now."
While there's little doubt that Ghanian authorities have their work cut out for them, Ghana's current fiscal slip translates to nothing more than a minor blip in the trajectory of a nation that has tremendous potential for many investors.
