Cedi depreciation to inflate external debt-to-GDP ratio to 78.5% end-2022

The continuous decline in the value of the local currency (cedi) against its anchor currency (dollar), is expected to inflate the value of the country’s external debt.

In a recent report by Fitch Solutions on the economy, Fitch Solutions asserts that Ghana’s external debt as a percentage of GDP is expected to increase to 78.5%.

The projected increment is from the estimated external debt-to-GDP ratio of 50.5% at end-2021, from the previous external debt-to-GDP ratio of 37.1% in 2017.

The cedi has lost roughly 30% of its value against the dollar since the beginning of this year.

“As a result of increased borrowing on international capital markets in recent years, Ghana’s total external debt stock has risen from 37.1% of GDP in 2017 to an estimated 50.5% of GDP in 2021. With most of Ghana’s debt denominated in foreign currency, the sell-off of the cedi – which lost roughly 30.0% of its value against the USD year-to-date (August 2022) – will inflate the external debt-to-GDP ratio to a projected 78.5% in 2022.

“We expect external borrowing to continue, further increasing already high interest payments over 2022 and causing the primary income deficit to widen to a forecast 8.2% of GDP, from 4.8% in 2021,” said Fitch Solutions .

Some factors accounting for the decline in the local currency include:

• the strengthening of the dollar,

• investor reaction to credit rating downgrades,

• the sharp rise in crude oil prices and its impact on the country’s oil bill and

• loss of external financing.

According to the Central Bank, measures put in place to stabilise the fast depreciation of the cedi include;

• its gold purchasing programme to increase foreign exchange reserves

• special foreign exchange auctions for BDCs,

• Support to the banking sector with foreign currency liquidity to help meet demand external payments
• Expected receipt of the $750m Afreximbank loan and the last tranche of the Cocoa syndicated loan.

Read details of Fitch Solutions recent assessment n Ghana’s economy

At Fitch Solutions we forecast that the Ghanaian current account deficit will narrow to 2.8% of GDP in 2022, from 3.2% in 2021. This marks a revision from our previous 2022 projection of a deficit of 3.1% of GDP, reflecting weaker-than-anticipated merchandise import growth of 7.7% y-o-y over the first four months of 2022, while exports grew by 17.1%.

Deficit To Narrow On Improving Trade Balance

Ghana – Current Account Balance, % of GDP

f = Fitch Solutions forecast. Source: Bank of Ghana, Fitch Solutions

Elevated global commodity prices will cause Ghana’s trade surplus to widen in 2022. Supply disruptions and risk-off sentiment following Russia’s invasion of Ukraine have increased prices of crude oil and gold – Ghana’s two leading export commodities (together accounting for roughly a third of total exports) – and in turn Ghana’s export earnings (see chart below). From a volume perspective, however, a projected decline of 1.3% in oil output in 2022 indicates that Ghana will not be able to reap the full benefits of elevated energy prices. In contrast, we expect gold production to expand by a healthy 4.0%, supported by the start of new gold mining projects and the integration of artisanal miners into Ghana’s formal gold mining sector. Taking these dynamics into account, we project merchandise exports to increase by a robust 26.9% over 2022, up from 1.8% in 2021.

High Oil Price Improves Terms Of Trade

Ghana – Citi Terms Of Trade; Global – Oil Price

Source: Bloomberg, Citi, Fitch Solutions

Meanwhile, weak economic dynamics will cap import demand. Elevated inflation – which reached 31.7% y-o-y in July – fiscal consolidation, and tighter monetary conditions are leading to deteriorating financial conditions for households and businesses. These dynamics will lead to lower demand for imported consumer and capital goods. As such, we expect merchandise import growth to remain well below export growth, at 15.0%, over 2022. Overall, we see the trade surplus widening to 4.4% of GDP in 2022, from 1.4% in 2021.

However, the positive impact of a larger trade surplus will be partly offset by a widening primary income deficit. As a result of increased borrowing on international capital markets in recent years, Ghana’s total external debt stock has risen from 37.1% of GDP in 2017 to an estimated 50.5% of GDP in 2021. With most of Ghana’s debt denominated in foreign currency, the sell-off of the cedi – which lost roughly 30.0% of its value against the USD year-to-date (August 2022) – will inflate the external debt-to-GDP ratio to a projected 78.5% in 2022. We expect external borrowing to continue, further increasing already high interest payments over 2022 and causing the primary income deficit to widen to a forecast 8.2% of GDP, from 4.8% in 2021.

Primary Income Deficit To Widen On Rising Debt Repayments

Ghana – Total External Debt

e/f = Fitch Solutions estimate/forecast. Source: World Bank, Fitch Solutions

Current Account Deficit To Widen In 2023

We forecast that the current account deficit will widen to 3.5% of GDP in 2023. While the trade surplus will remain sizeable by historical standards, it will narrow slightly to 4.2% of GDP on easing oil and gold prices. We forecast merchandise import growth of 4.0% to outpace export growth of 1.4%, as moderating price pressures will gradually improve financial conditions for households and businesses, increasing demand for imported goods and services. At the same time, we project that the primary income deficit will widen further to 9.4% of GDP as external interest payments continue to rise. In addition, we expect multinationals, which will have benefited from elevated global commodity prices over 2022, to expatriate large profits in Q123 (the period during which Ghana-based multinationals typically repatriate profits), leading to higher outflows and weighing on the primary income account.

Balance Of Payments Deficit To Put Further Pressure On Reserves

Ghana – Foreign Exchange Reserves, USDbn

Source: Bank of Ghana, Fitch Solutions

Despite a widening balance of payments deficit caused by large financial account outflows, we believe that an expected IMF deal will help to support Ghana’s external position in 2023. In Q122, capital and financial outflows increased by 188.7% y-o-y to USD690mn, driven by net portfolio reversals and FDI outflows. Combined with the country’s current account deficit, this has resulted in an overall balance of payments deficit of USD934mn in Q122 (latest available data), as against a deficit of USD430mn in Q121. We expect net capital flows to remain in negative territory over H222 given deteriorating investor sentiment towards Ghanaian assets, as reflected by the currency sell-off and rising bond yields. At the same time, Ghana is unable to tap international capital markets to finance the deficit, and this is putting downward pressure on its foreign exchange reserves, which have fallen to USD7.7bn in June, from USD9.8bn in January (see chart above). That said, an IMF financial package of USD3.0bn, which we expect to be approved in Q422, should alleviate pressure on Ghana’s external position in 2023.