The Bank of Ghana has warned that Ghana is now in violation of three key fiscal thresholds used by the international development and financial communities to assess the financial standing of what are referred to as “Market Access Countries” which means nations that access international capital markets for financing using sovereign debt instruments. Ghana’s regular issuance of Eurobonds makes It a ‘MAC”.
While Ghana’s exceeding the 70 percent public debt to Gross Domestic Product ratio – the country’s ratio reached 70.1 percent by October and is expected to rise significantly further by the end of 2020 due primarily to general election related expenditure – has attracted all the public attention, BoG Governor Dr Ernest Addison has drawn attention to two other key thresholds which Ghana has now exceeded as well. All three violations are basically the result of COVID 19 which has increased public spending and slashed public revenues in 2020.
One is the gross financing need, which, going by the accepted threshold for MACs should not exceed 10 percent of GDP. However gross financing needs are determined by the size of the fiscal deficit which needs to be financed and this means Ghana ‘s gross financing needs for 2020 will be at least 11.8 percent, and even this depends on the (uncertain) likelihood that government will stay within its revised fiscal deficit target. By September the deficit was only marginally above target but since then government has engaged in several expenditures not originally planned for, such as cash payments to depositors and investors to the cumulative tune of over GHc4 billion and there have been no indications that this has been funded by similarly higher than planned public revenue.
The other key ratio exceeded has blind-sided analysts altogether, being outside their radar. This is a 45 percent of GDP threshold for non-resident holdings of the public debt, which has been well exceeded by Ghana’s current ratio of 59.9 percent.
The central bank Governor made these revelations while delivering this year’s University of Ghana alumni lecture last Friday. He noted that “although external financing requirement as a share of GDP has declined and is within acceptable thresholds, efforts would need to be put in place to increase buffers to help meet future external obligations.”
Indeed, foreign investors share of cedi denominated government bonds has declined from a peak of 32 percent in 2018 to around 18 percent in 2020, having been replaced primarily by investments made by recently recapitalized commercial banks.
However, even though Ghana’s exceeding the three key MAC thresholds is not expected to put the country in any peril over the near term, it could mean having to pay higher coupon rates to demanding investors on the impending Eurobond issuance planned for early 2021.