IMF bailout extension gives comfort to the market – RMB

September 4, 2017
Source: Bernard Yaw Ashiadey l l Ghana
IMF bailout extension gives comfort to the market – RMB

South African based research firm, RMB Research, has lauded the government decision to agree an extension of the IMF bailout programme with Ghana, noting that it brings comfort and continuous fiscal discipline to the market.

“The IMF’s prolonged stay gives comfort to the market of continued fiscal discipline. Given the West African giant’s track record with expenditure overruns, life after the IMF programme would have introduced a higher sovereign risk premium,” the research firm noted.

The IMF approved an extension of its Extended Credit Facility (ECF) package for Ghana, initially worth US$918 million, which will see the programme continue for an extra year beyond its original April 2018 end date.

The decision was made during a meeting of the Fund’s executive board that also approved a tranche of US$94.2 million in balance of payment support following the fourth review of the programme

“The IMF’s support and approval add vigour to the steady recovery of Ghana’s economy: real GDP is growing at its fastest pace in more than two years; the central bank is cutting policy rates as inflation slows; and bond yields are falling to record levels,” RMB added. 

Policy anchor

RMB called for a further narrowing in the deficit in 2017 and 2018, due to a strengthening of the economy and planned fiscal consolidation, but noted that the 3percent deficit target for 2019 is too optimistic given the ruling party’s commitments to campaign promises.

“The rate of decline in the fiscal deficit will not be enough to significantly improve debt levels. We expect the level to remain above 70percent of GDP over the medium term. Debt sustainability will entail continuous fiscal consolidation and vigorous economic growth. 

If passed, the planned legislation that sets to impose a statutory limit of not more than a 5percent budget deficit will go a long way to limiting the risks of a fiscal blowout,” it added. 

Ghana signed onto the programme in April 2015 hoping to restore fiscal balance to an economy dogged by budget deficits, rising public debt and inflation.

The successful review had been delayed after the new government of President Nana Akufo-Addo opened new negotiations with the IMF aimed at getting the programme back on track after it suffered significant setbacks last year.

“The authorities have taken some encouraging steps and the economy is showing signs of recovery,” the IMF said in a statement.

It called for additional efforts to address revenue shortfalls and full enforcement of expenditure control measures to contain spending and prevent the recurrence of domestic arrears.

Ghana should also tackle energy sector inefficiencies, particularly improving the management of the state-owned enterprises, the statement added.

Deputy Finance Minister, Charles AduBoahen, praised the thumbs up from the IMF board, saying: “It’s positive news. The government team has worked really hard on ensuring that we met all the prior actions before the deadline.”

The extension of the programme puts to rest uncertainties created by Akufo-Addo’s announcement in July that Ghana would not seek an extension.

Eurobond reaction: Don’t expect a relief rally

RMB Research indicates that dollar bonds, in the run-up to the review, barely registered any signs of nervousness ? it was largely expected that Ghana would pass the review.

Both the World Bank partially-guaranteed 2030 bond and the 2026 issuance are currently trading at their best levels, due largely to the supportive emerging markets backdrop, it said.  

“Interestingly, the 2026 (no guarantee) bond has slightly outperformed the 2030 (guaranteed) in the past two months, implying that the market is comfortable with Ghana’s risk profile.”