Market pessimism around debt sustainability has persisted during H1-2022, limiting the government’s financing options.

Authorities opted to fund their budget with operations with the Bank of Ghana.

The deterioration in macroeconomic conditions forced the government to request assistance from the International Monetary Fund.

We forecast an annual inflation rate of 49.2% and a GDP expansion of 3.7% for 2022.

BUY: Cash prices are below our conservative recovery value estimates of 49-57% at a 12% exit yield, which makes us think that the market is overreacting to the admittedly poor fundamentals.

Ghana has been one of the worst-performing emerging markets of the year, with a total return of -29.6% on its benchmark sovereign bond.

The government has been stubborn regarding its fiscal consolidation path, although the market has already disapproved it.

Bailout talks with the IMF have already begun, aiming for an economic support program that would last at least three years.

Protests in the country are arising due to the increasing cost of living, as inflation surged to 27%.

Even in a debt restructuring scenario, the Eurobond prices are so low that the future returns are showing a positive asymmetrical distribut...

Ghana’s GDP grew 3.3% YoY in Q1-2022, driven by the expansion in service and agriculture activities.

Mining and oil and gas activities, two key export industries, stagnated for the second quarter in a row.

Despite the positive result, the expansion fell below market expectations, jeopardizing the country’s economic outlook.

We revise downwards 1.0 p.p. our forecast to a 3.7% GDP expansion for 2022, given the domestic and external challenges that Ghana must face.

The annual inflation rate rose to 27.6% in May, its highest level in the last decade.

We do not think demand is putting excessive pressure on prices, as economic output has been close to its potential over the last year.

But external imbalances are causing a sharp depreciation in the exchange rate that is boosting domestic inflation (pass-through effect).

The exchange rate fell by 22.6% YTD  to 7.95 GHS/USD.

With bonds trading at 55.8 cents on average we like the risk/reward profile and maintain our BUY recommendation for the name.

Fiscal mismanagement drove Ghana to its current critical situation, and its fiscal outlook remains negative.

The fiscal deficit stood at GHS 10,244 mn (-2.1% of GDP) in Q1-2022, 940 mn less than what had been officially forecasted.

However, the lack of external financing sources, mixed with the rising cost of issuing new domestic debt, forced the government to rely on the Bank of Ghana to fund its deficit.

We forecast an overall balance of -6.8% of GDP for 2022, 0.2 p.p. better than the budgeted target, but still a worrisome result in terms of debt sustainability. 

BUY: With such low prices, we like the risk-re...

The overall fiscal gap was -8.6% of GDP in 2021, 0.1 p.p. lower than the budgeted amount.

The E-Levy tax was finally approved by the parliament after being cut to 1.5% from the initially proposed 1.75%.

Despite the new tax approval, the tightening economic conditions will force the authorities to cut expenditure to guarantee the achievement of the fiscal deficit goal.

We update our overall gap projection to -6.8% of GDP, 0.2 p.p. lower than the official forecast. 

BUY: We still believe the government has the time and the tools to address sustainability and revert the market sell-off, which would result in considera...

Ghana recorded a 5.4% YoY GDP expansion in 2021, higher than both the official forecast and our own estimations.

The result was driven by the service and agriculture activities.

Despite the positive result, mining and oil and gas activities, two key exporter industries, contracted for the second year in a row.

We forecast a 4.7% GDP expansion for 2022, 0.4 p.p. lower than the official projection.

Ghana ended up last year with a -3.3% of GDP current account deficit, funded by capital inflows from the public debt issuance and foreign direct investment.

The positive trade balance has shrunk -7.2% YoY until February-21, which combined with FX demand pressures from offshore secondary market activities, and importers, has tightened the FX liquidity.

The pressures over the hard currency market have resulted in a sharp depreciation of the Cedi (-18.5% YTD).

We forecast a widening current account gap of -5.5% of GDP for 2022.   

BUY: With bond prices around the 60-handle, we like the risk/reward profile for...

Ghana has been one of the worst EM underperformers in the last 12 months.

With prices now around the mid-60s, the market seems to be pricing a debt distress scenario.

Nonetheless, a favorable debt service schedule and high coupons combine for a very attractive investment.

The country's risk premium has soared since September-2021 due to concerns around fiscal management and debt sustainability.  

Despite the souring investor sentiment, authorities have opted to stick to their plan of gradually reducing the fiscal deficit.

The general government's overall fiscal balance stood at -9.0% of GDP in 2021, 0.1 p.p. lower than the budgeted amount.

We forecast a -6.8% of GDP fiscal deficit for 2022, 0.2 p.p. higher than the official forecast, as we forecast both lower revenues and expenses. 

Decent liquidity ratios make us believe that the market is overreacting as the curve...

Years with high fiscal deficit and the subsequent deterioration of debt sustainability indicators put the 2022 focus on the government’s fiscal position.

The government plans to introduce a tax on mobile money payments to boost its revenues. The parliament will review the proposal by the end of January.

We forecast a positive fiscal primary balance of 0.3% of GDP and an overall deficit of 6.8% of GDP.

The country will keep its growth momentum going, and we forecast a real GDP expansion of 4.5% of GDP.

HOLD: Although solvency ratios do not look good at all, plus the recent sell off unables the country to look f...

Up to September, the overall fiscal deficit stood at GHS 29,263 mn (-6.6% of GDP), and we expect it to rise to -8.9% of GDP by the end of the year.

Fiscal revenues have disappointed as a consequence of weaker than expected economic activity.

The public debt stock rose to USD 58,249 mn (76.4% of GDP), 14.6% higher than in December-2020.

Despite concerns around debt sustainability, authorities didn’t modify their consolidation plan and budgeted a fiscal deficit of -7.0% of GDP for 2022.

Given the balanced risks and rewards for the sovereign curve, we maintain our HOLD rating for the name. We also suggest the gua...

Ghana’s sovereign curve has bear-flattened towards inversion over the past 3 months as the bonds suffer a sharp sell off.

Yields rose on average 385 bps since the end of August on rising sustainability concerns due to higher debt levels, slower fiscal consolidation and weaker growth.

We remain unconvinced of Ghana as a credit overall, but we like the risk/reward in the guaranteed 30's.

The partial guarantee covers up to USD 400 mn in interests and principal payments in case of a sovereign default.

Public debt has risen to around USD 58 bn, equivalent to 76.2% of GDP, 13.8 p.p. higher than the pre-pandemic level.

External debt rose to USD 28,078 mn (36.9% of GDP), with Eurobonds making up almost half of the total.

Total public debt to exports (247.2%) and external debt service to exports (9.5%), remain at a healthy level but trending up.

Domestic debt stood at USD 29,969 mn (39.3% of GDP) in Q2-2021, out of which 19.5% is held by non-residents.

HOLD: Given strong growth prospects, manageable debt ratios and the severe punishment already suffered by the bonds in the last months, we maintain our long-term HOLD f...

The Monetary Policy Committee decided to hold the policy rate unchanged at 13.5%, as inflation concerns were balanced by a more optimistic growth outlook.

However, our take on the recent development in both indicators is not as optimistic as the official perception.

Real GDP growth rate in H1-2021 was an underwhelming 3.5% YoY, moving the country away from its official target of a 5.0% YoY expansion this year.

The annual inflation rate soared for the third consecutive month, closing at 9.7% YoY, almost reaching the upper limit of the target band.

HOLD: Ghana’s debt offers an attractive yield, but the high publ...

Oil and gold export volumes contracted during H1-2021.

However, the sharp increase in prices offset the volume losses, pushing exports to USD 7,593 mn in H1-2020, a +2.7% YoY increase.

The current account balance stood at USD -921 mn in H1-2021, on track to match our forecast of USD -1,907 mn for the year (2.5% of GDP).

The March issuance of USD 3.0 bn worth of Eurobonds by the government helped to fund the current account deficit, and boosted international reserves.

HOLD: Ghana’s debt offers an attractive yield, but solvency and liquidity indicators are weak.  

In the latest IMF’s Article IV review for Ghana, the country was categorized as being at high risk of debt distress.

However, despite the increased repayment risk, the IMF expressed confidence in the ability of the country to fully meet its debt obligations.

In June, total public debt reached USD 58.1 bn (77.2% of GDP), an increase of USD 7.2 bn YTD.

We believe the total debt stock could rise to USD 64,8 bn by the end of 2021, 86.2% of GDP.

HOLD: The dire fiscal situation in Ghana is worrying, but the social bond remains an interesting opportunity to buy.

After a series of financial system reforms, the number of banks in Ghana went from 36 in 2017, to the current 23 institutions.

According to the Ministry of Finance, the cost of the financial sector cleanup rose to GHS 16.4 bn (4.6% of GDP).

The industry now has a smaller number of players but is more sustainable, better regulated, resilient, and better suited to support economic growth.

The financial soundness indicators at the end of Q1-2021 show robust numbers in capital adequacy, earnings, liquidity, and asset quality.

HOLD: The commodities cycle and the issuance of a new bond maturing in 10 years keep the market...

The general government recorded an overall fiscal gap of -10.8% and a public debt stock of USD 50.8 bn (76.1% of GDP) in 2020.

In Q1-2021 the overall balance was -2.4% of GDP, funded almost entirely by domestic loans.

With the recent Eurobond issuance and domestic loans to finance the budget, the total general government debt stock rose to USD 58.6 bn (77.9% of GDP).

Debt interest payments are expected to be equivalent to 50% of total revenues by the end of 2021 (up from 44.6% in 2020).

After more than a year of expansionary monetary policy and low rates, doubts arise as to whether Africa's central banks will be able to maintain it

Amid concerns about the reactivation of the economies, inflationary pressures arise that put pressure on the monetary authorities

Central banks, which tend to act collectively, maintain a policy of greater tolerance to inflation to stimulate economic growth

The Ghanaian cedi has appreciated 1.78% YTD (from a depreciation of 3.7% at the end of 2020).

The commercial balance of goods recorded a surplus of USD 2,016 mn in 2020, and we forecast another positive result of USD 1,857 mn for 2021.

Foreign Direct Investment (FDI) shrunk in 2020, but the nation has traditionally been an attractive market for companies, by regional standards.

Authorities are looking to boost FDI by alluring new capital into the country through a set of liberalizing policies.  

HOLD: Although the recovery in commodity prices is good news for debtholders, the current fiscal situation requires a...

We focus on the largest African commodity exporters within the EMFI universe, which would benefit from the current price boom.

The benefits of a bull commodity cycle will enhance liquidity buffers and help improve fiscal accounts, but getting countries back on a debt sustainability path takes more than that.

The emerging countries that benefit must take advantage of the tailwinds to undertake structural changes that can improve long-term solvency.

GHANA 30, issued in 2015, has a differentiating element in the country's curve, a partial guarantee for 40% of the total nominal amount supported by the World Bank.

The partial guarantee on the bond keeps it two risk ratings below the rest of the country's bonds.

The bond's yield is 6.59, 91 bp above the implicit yield according to its structure, which confirms that it is a BUY opportunity.

Ghana registered real GDP growth of 0.4% in 2021.

The result was close but slightly below our own estimate of 0.6%, and lower than the forecasts of the IMF and the government of 0.9%, or the 1.4% estimated by the World Bank.

The inflation rate stood at 10.3% YoY in March 2021, slightly above Bank of Ghana’s (BoG) target.

The government placed four Eurobonds for USD 3,000 million with yields between 6-8% with the intention of carrying out a liability management operation. The operation had a target of 5 billion dollars, but it did not reach the interest rate target and the government decided to place less than origin...

One of the largest economies from the Sub-Saharan Africa region is transitioning an unhealthy fiscal path.

While the pledge to cut the fiscal deficit is positive, historic performance does not make the case for a promising future.

While domestic debt remains, by far, the main financing source, Eurobonds have grown more important since 2018. However, Ghana’s unsustainable debt dynamics could risk tighter issuance windows in the short and medium term.

We maintain our HOLD rating, as yields are attractive enough to make it worthwhile the wait for better fiscal results, all while the forecasts of elevated deficit and gr...

Ghana ended up 2020 with a fiscal deficit of 10.6% of GDP.

On the revenue side, the COVID-19's crisis affected negatively the result, closing at 14.2% of GDP (-1.1 P.P yoy), while expenditure expanded to 25.4% of GDP (+5.4 P.P yoy) to palliate the negative effects on the economy.

Total public debt is estimated at USD 50.5 bn in 2020, 72.8% of GDP.

Government authorities projected only a slight improvement in the fiscal balance for 2021, with a gap of -8.7% of GDP. 

HOLD: Higher prices for commodities and an uptick in the GDP growth rate counterweigh the fiscal deficit and public debt, which are running wild...

Commodity prices have performed spectacularly after the chaos of March 2020: Precious metals (+ 25%), Gas (+ 66%), Oil (+ 254%), Copper (+ 93%) and Coal (+ 74%)

Some short-term conditions such as the stimulus packages of the main economies, inflationary risks and the weakness of the dollar promote a rise in real assets

Increased industrialization in India and the maintenance of government spending at high levels, support the boom in the long term

For now we know that there is a rise in prices, but there is no certainty that there will be a supercycle of several years because all the long-term factors are variable

Of...

Ghana’s average oil production was 201 TBD in 2020, a 0.1% YoY increase.

Oil and gas production accounted for 21.1% of industrial output and 8% of total GDP in 2020.

Oil is the second single export item of the country, only surpassed by gold.

In November 2020, the G20 countries and the Paris Club agreed on a common framework to deal with LICs with debt problems

The common framework seeks to provide more comprehensive support that goes beyond the pandemic shock

The key differences with the DSSI are that it has no time limitations, and requires both private sector involvement and IMF engagement

Incumbent President Akufo-Addo got reelected last year, but the electoral event is under analysis, as a challenge to the results introduced by the opposition is being reviewed by the Supreme Court.

Parliament composition is also on hold pending the challenge decision, but if results are confirmed, Akufo-Addo will deal with a hung parliament on his second term.

We expect the overall fiscal deficit to stand at -8.6% in 2020, improving in 2021 to -5.7%.

Ghana managed to keep its streak of economic growth. We estimate a real GDP variation of 0.6% in 2020, which will accelerate to 3.6% in 2021.

We maintain our HOLD on Gh...

Emerging markets faced massive capital flight as a result of the COVID-19 crisis.

However, there has been debate as to whether the severe initial shock was primarily the result of an interruption in liquidity flows and not the deterioration of macroeconomic variables.

Growth in emerging economies may have taken a permanent hit but, at the same time, emerging markets could become more attractive to those hunting for yield.

We believe that the deepness of the impact of the pandemic on EMs can be quantified.

On December 7, incumbent President Nana Akufo-Addo from the New Patriotic Party, was re-elected in the first round with 51.3% of the votes.

The election had a high turnout, with 78.9% of the registered citizen casting their votes.

For the first time an elected president will face a hung parliament, as the New Patriotic Party and the National Democratic Congress won 137 seats each, with the remaining one going to an independent candidate.

Opposition Candidate John Mahama rejected the result and will challenge them at the Supreme Court.

Despite fears of high bond debt, our recommendation is HOLD Ghana's debt.

General elections will be held on December 7, 2020, to elect a new president and Parliament.

Ghana’s main opposition party has nominated former president John Mahama to challenge the incumbent, President Nana Akufo-Addo.

A survey by the Political Science Department of the University of Ghana has predicted a victory for President Nana Addo Dankwa Akufo-Addo with 51.7% of the votes.

GHANA 32 traded at 101.99 cents on the dollar on Monday, a significant increase of 11.2% in the last month. Meanwhile its YTM fell 150 bps to close at 7.85%.

Pressure grows on China, as one of the world's main creditors, to enter the DSSI without restrictions

The terms of China's agreements with emerging or frontier nations are extremely aggressive compared to members of the Paris Club

One issue to keep an eye on is the participation of Chinese state banks in the renegotiations, as these entities hold about 75% of the country's total debt

Chinese authorities have spoken with 20 countries about the DSSI, and it has approved relief for an amount close to USD 3 bn for 10 countries

Angola and Zambia are the countries that most urgently need to address a restructu...

November’s inflation stood at 0.7%. With this result, y-o-y inflation continued accelerating and reached 8.5%, 0.8 percentage points compared to October y-o-y inflation (7.7%). This is the first time since the statistics institute changed base year that inflation is above the central bank's average target (8%, +/-2%).

As of August, the Ghana Institute of Statistics updated the basket of goods with which the Consumer Price Index is calculated, from 267 to 307 goods, and changed base year from 2012 to 2018. Likewise, data collection points went from 42 to 44.

Despite the November’s rise, looking back it seems like...

According to the debt issuance calendar published on the website of the Ministry of Finance, the government will issue GHS 10.3 bn (USD 1.8 bn or 3% of GDP) before the end of 2019. Out of this amount, GHS 8.8 bn (USD 1.6 bn) would be used to roll-over maturities, while will serve for general government financing.

As part of a memorandum signed between the two nations last year, China will finance USD 2 bn in rail, road and bridge networks, and in return, China will be granted access to 5% of Ghana's bauxite reserves, which are partly located at the tropical rainforest of Upper Guinea in West Africa.

The ore will be mined in part of the Atewa forest reserve, which is the source of three major rivers (Ayensu, Densu and Birim) that provide water to five million people. For this reason, conservationists and water experts have spoken against the agreement, since the risk of water pollution is high.

On the other hand, Ghana’s increa...

On November 13, the Minister of Finance, Ken Ofori-Atta, submitted the 2020 Draft Budget and the Government's Economic Policies to Parliament. This is the first budget of the current administration in which it will not be subject to the restrictions of an agreement with the International Monetary Fund (IMF). In April 2019,  a four-years financing program with the IMF ended. The program aimed to reduce the fiscal gap and restore debt sustainability. On its last visit, at the beginning of October, an IMF mission recommended maintaining fiscal discipline in the period prior to the December 2020 general elections.

The clousure of Nigeria’s land borders with Benin, to stop the smuggling of goods such as rice, used cars, and gasoline, has had adverse effects in Ghana. Despite not sharing a land border, the overall trade between the two nations accounted for USD 240 mn in 2018. The Nigerian authorities has stopped Ghanaian traders who have had their goods locked up at the borders after Nigeria made the decision on August 21. Tensions have arosen after Nigeria’s government announced on November 3 the extension of the closure until January 2020.

According to Ghana’s Minister of Information, Kojo Oppong Nkrumah, both Ghana and Nige...

The IMF mission, led by Carlo Sdralevich, visited Accra from September 30 to October 11 to conduct discussions on the 2019 Article IV Consultation. On October 24, the Fund said in a press release that Ghana's economic outlook is favorable. Overall, Ghana's growth is backed by prudent economic policies, strong extractive industry activity and a safer banking system.

On October 7, Springfield Exploration and Production Limited (SEP) began drilling in deep waters off the coast of Ghana. The company hired the Stena Forth charter to drill two wells in the area called West Cape Three Points Block 2 (WCTP2). The block host an important oil and gas potential. WCTP2 is exceptionally well located between the fields Jubilee (total proven reserves are around 370 million barrels) and Sankofa (204 million barrels) and is immediately north of the Hess' Pecan, Hickory, Almond, Paradise and Beech discoveries.

According to the Central Bank figures, the total public debt rose to GHS 205.5 bn (USD 39.1 bn) from GHS 159.7 bn (USD 34 bn) in July 2018. The external public debt stood at USD 20.4 bn (31% of GDP) in July, while the domestic public debt stood at USD 18.7 bn (28.4% of GDP).

According to Central Bank’s latest data, the economy grew by 5.7% in the second quarter of 2019, maintaining a steady pace compared to last year, when it grew 5.4% in the same period. Meanwhile, Fx rate has depreciated faster, at 9.2% year-to-date compared to a 7.6% registered in the same period of 2018.

On August 30, Springfield Exploration and Production Limited (SEP), an oil exploration company owned by Ghanaian tycoon Kevin Okyere, is about to become the first independent Ghanaian company to drill in deep water. 

Ghana has recently seen its oil sector develop, since explotation began in 2010. Finance Minister Ken Ofori-Atta recently indicated that production will increase from 200 thousand barrels per day (kbd) this year to 420 kbd in 2023. 

On August 22, Ghana issued GHS 162.1 mn (USD 30 mn) of 20-year local currency bonds with a 20.2% yield. This amount was well below its goal of raising GHS 450 mn (USD 83 mn). Investors were not interested given foreign exchange risk and distrust in the country's economy in the long term.

On August 13, the Central Bank of Ghana published its semi-annual report on Ghana's oil funds. This report highlighted that the government obtained USD 434.5 million from the sale of oil produced in its three oil fields, as well as other fees and taxes.

Of the total revenue obtained, the central bank revealed that USD 69.8 million was allocated to the Ghana Stabilization Fund and USD 29.9 million to the Ghana Heritage Fund, which means an increase of 12.8% as a whole, compared to the level of the beginning of the year

As we indicated in our previous report, it is estimated that Ghana will record a budget deficit of 4.5% of ...

On July 29, the first debate was held for the mid-year review of the public budget. The Minister of Finance, Ken Ofori-Atta, presented a motion in the House to request parliamentary approval to spend additional GHS 6,370 million (USD 1.182 billion) to support government spending for the rest of the year. Although much of the parliament supported the government's request, a fraction has taken this as a sign of the disruption of public finance conditions. For this reason, this fraction predict Ghana's returning to the International Monetary Fund (IMF) to ask for a new rescue.