Fitch Solutions: Ghana’s weak external position to strengthen on expected IMF Deal

Ghana’s weakened external position is anticipated to strengthen in view of the pending bailout request from the IMF by the Government of Ghana.

According to research agency Fitch Solutions, the anticipated IMF bailout deal will help support and strengthen the country’s external position in 2023 – government and IMF is expected to conclude on the deal by Q1 2023.

The strengthening of the country’s external position Fitch Solutions notes, will be despite the widening balance of payments deficit due to large financial account outflows.

“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,” said Fitch Solutions.

According to the research agency, capital and financial outflows in Q1 2022 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 $934m in Q1 2022, as against a deficit of $430m in Q1 2021.

“We expect net capital flows to remain in negative territory over H2 2022 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 $7.7bn in June, from $9.8bn in January. That said, an IMF financial package of $3bn, which we expect to be approved in Q4 2022, should alleviate pressure on Ghana’s external position in 2023,” added Fitch Solutions.

IMF BoP support to Ghana pegged at $3b

Government could secure as much as $3 billion from the International Monetary Fund in Balance of Payment [BoP] support to stabilise the economy.

The $3bn BoP support, reports further indicate, will be made available in tranches spread over three years.

A billion dollars is expected to come in immediately if the Fund approves government’s Enhanced Domestic Economic Programme.

The amount is double what the country was considering a month ago as it tries to shore up its finances and gain access to the global markets.

“Since negotiations for the programme are starting now, it’s too early to comment on the final form the programme will take,” an IMF spokeswoman said in an emailed response to Bloomberg.

“The Extended Credit Facility for low-income countries is the Fund’s main tool for medium-term support for countries facing protracted balance of payments problems, similar to Ghana’s. The duration of such an arrangement is between three to four years, and extendable to five years”, she pointed out

The government began discussions with the Bretton Wood institution in July 2022, reversing President Akufo-Addo’s administration pledge not to seek a financial programme from the IMF.

Ghana has been struggling to stabilise a rising debt which hit 78.3% of Gross Domestic Product at the end of June 2022, from 62.5% five years ago.

The struggling economy has impacted negatively on the cedi which has hit GHS 9 to a dollar. This has also pushed inflation up significantly.

Ratings agency, S&P on Friday, August 5th, 2022, revised Ghana’s rating from B-/B to CCC+/C, putting the country’s creditworthiness into junk status.

It also reviewed the country’s economic outlook to negative, reflecting “Ghana’s limited commercial financing options, and constrained external and fiscal buffers.”

Source: norvanreports