Flash Report /

Ghana mid-year budget blues… again

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    30 July 2019
    Published by

    The key takeaway from Ghana’s mid-year budget review yesterday is the upward revision to the 2019 fiscal deficit target (excluding financial sector costs), to 4.5% of GDP from 4.2% (contained in the 2019 Budget presented in November).

    The revision may not be that much of a surprise. The 0.3pp difference is essentially the same size as the overshoot seen in H1, in which the provisional deficit outturn of 3.3% of GDP exceeded the H1 target of 2.9%. And the first-half fiscal underperformance is not unexpected. We noted Q1 fiscal slippage in our FI Strategy Outlook on 16 July, and the central bank reported a higher-than-projected fiscal deficit in the first five months at its last MPC meeting on 19 July. Hence, the mid-year budget essentially locks in that H1 overshoot, which arose due to a combination of revenue weakness (revenue and grants were 15.5% below target) and faster execution rate of spending. 

    But investors may have hoped for better news. While markets may have seen this coming, they may have hoped to see a more concerted fiscal effort to reverse the H1 underperformance and retain an unchanged 2019 overall deficit to build fiscal credibility. It might even be seen as positive that the authorities did not expect the deficit to get much worse (although we think risks are skewed more to the downside, ie higher deficit). But markets will be slightly nervous that the revision has taken place at all and that, just three months after successfully exiting its IMF programme, fiscal slippage has returned, and returned so quickly. Such concerns are especially pertinent with the next presidential election due at the end of next year (and pre-election fiscal slippages have become somewhat common in Ghana).

    Of course, there is a hard limit to the fiscal deficit with the government’s self-imposed fiscal rule that limits the deficit to 5% of GDP. Such a rule (while not ideally specified) would eliminate the worse excesses of previous pre-election periods. But it will still cause damage to policy credibility if fiscal underperformance continues and the revised 4.5% target itself ends up being too optimistic. Or that the government breaches the 5% limit and justifies it on one-off or special factors. For now, we note that the government does seem committed to respect the 5% limit.

    The finance ministry noted that the fiscal outlook for H2 19 remains “sound”, with measures to safeguard the revised target. This includes improving domestic revenue mobilisation (although why such measures would work now, when they haven’t in the last three years is not clear), spending restraint and addressing structural issues in the energy sector. Financing in H2 19 is also expected to include a World Bank development policy loan of US$500mn, once approved. 

    In its mid-year budget review, the government also downgraded its real GDP growth forecast for this year to 7.1% from 7.6%, due to base effects and lower projected O&G volumes.

    Ghana’s eurobonds have weakened this week, with the ‘29s down around 1.5pts since Friday’s close, with the (mid) yield rising to 7.3% (according to Bloomberg prices). However, given overall EM market weakness it is not clear how much, if any, of this move reflect concerns over Ghana’s own fiscal developments. Still, investors will no doubt be monitoring closely the fiscal performance during H2 19 to see if Ghana can stick to its revised target; especially us, after we made our Buy on Ghana one of our Top-5 picks! We keep with this view for now.