Ghana Rate Hike Alone Unlikely to Support Currency.

 

The decision by Ghana's central bank to increase interest rates and introduce new foreign-exchange controls is unlikely to ease pressure on its currency, the cedi, in the absence of accelerated fiscal consolidation to address growing domestic macroeconomic imbalances, Fitch Ratings says.

Ghana's budget deficit has averaged 11% over the past two years and is the root cause of these imbalances. The current account deficit increased to 12.3% of GDP in 2013, up from an average of 5.7% in the two years prior to 2012's election-related fiscal blowout. This has constrained the Bank of Ghana's capacity to add to reserves, which have hovered around three months of import cover.

Concerns about funding twin deficits in excess of 10% of GDP have weighed on the currency, which fell 14.6% in 2013, and has dropped a further 7.8% so far this year, making it one of the hardest hit Sub-Saharan African currencies since the US Federal Reserve first discussed tapering in May last year. Inflation has risen sharply, reaching 13.5% by December 2013 because of loose fiscal policy and the weakening exchange rate.

The Bank of Ghana increased the policy rate by 200bp to 18% on 6 February, having brought forward its monetary policy meeting. The increase followed the announcement a few days earlier of various foreign exchange controls, including restrictions on foreign currency-denominated loans, repatriation of export proceeds, margin accounts for import bills, and revised operating procedures for foreign-exchange bureaus.

A slow-down in fiscal consolidation in 2013 and the risk of further fiscal slippage was a key driver of our downgrade of Ghana's sovereign rating to 'B' from 'B+' in October. Any deterioration in public and external finances that puts debt on an unsustainable path and jeopardises Ghana's external financing capacity would place the rating under pressure.

Contact:

Carmen Altenkirch
Director
Sovereigns
+44 20 3530 1511
Fitch Ratings Ltd
30 North Colonnade
London E14 5GN

Mark Brown
Senior Director
Fitch Wire
+44 20 3530 1588


Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.