Hmmmmm...Fitch: Ghana central bank having to fund deficit (FT) Fitch Ratings has issued a gloomy research piece on Ghana, once a darling of African investors, highlighting that banks are now refusing to fund the yawning budget deficit, which is overwhelmingly financed by the central bank. Ghanas current account and budget deficits have widened dramatically in recent years, driven by ramped-up government spending on salaries ahead of the last elections, and the country now faces an old-fashioned debt crisis. Talks with the International Monetary Fund have dragged on, and concerned over their holdings of Ghana government bonds, local banks have cut back their state holdings, Fitch said in the report. The rating agency estimates that the central bank has therefore been forced to print money to finance about 90 per cent of the budget in the first five months of the year, or $1bn. Interest payments now account for a fifth of government spending as rates have shot up. The BOG‟s role in funding Ghana’s budget deficit in the first half of the year illustrates the financing challenges the government faces. The authorities highlighted a shortage of cedi liquidity in the market, due to the sharp depreciation of the local currency and an increase in the cash reserve requirement, as the main reason banks and non-bank financial institutions cut back their holdings of government securities and contributed towards the central bank monetizing $1bn (or 90 per cent) of the budget deficit during the first five months of 2014. Fitch believes that increased risk aversion could be another reason. Despite the awful and deteriorating fiscal and economic backdrop, Ghana was able to use the prospect of an IMF bailout to issue a $1bn bond earlier this autumn – something investors could regret if the fund demands a restructuring in return for its aid. The biggest private sector lender to Ghana is Franklin Templeton, a US fund manager that holds over $1.1bn of Ghanaian government bonds - over a tenth of its entire bond market, according to Bloomberg data. The government has promised to bring down the budget deficit, but Fitch doubted that it would be able to do so, given its track record. Fitch believes the pace of fiscal consolidation in 2014 will be slower than the government projects. This reflects a divergence in views on the government’s capacity to significantly expand the revenue base, and challenges containing current expenditure. Fitch therefore forecasts a deficit of 10.1 per cent of GDP for 2014. The magnitude of fiscal consolidation in the coming years will depend on the path of deficit reduction agreed with the IMF. The Ghanaian cedi has rallied almost 18 per cent against the dollar from its summer nadir, but has still lost over a third of its value this year. ft/fastft/246251/ghana-central-bank-funding-budget-deficit-fitch
Posted on: Thu, 04 Dec 2014 21:41:08 +0000
Trending Topics
Recently Viewed Topics
© 2015