Economic downgrade could affect SMEs’ growth

Islamic finance

The economy’s continuous downgrading by international rating agencies could derail the Ghanaian Small Medium Enterprises (SMEs) sector’s ability to attract investors, scale up and play a leading role in the country’s economic recovery, Dean of the University of Cape Coast School (UCC School) of Business, Prof. John Gatsi, has warned.

Speaking to Business and Financial Times (B&FT) on the impact of Fitch Ratings’ latest downgrading of Ghana’s Long-Term Local- and Foreign-Currency Issuer Default Ratings (IDRs) to ‘CC’ from ‘CCC’, Prof. Gatsi also observed that this development might further hamper the country’s quest to be a major player in the African Continental Free Trade Area (AFCFTA) through the SMEs sector.

The recent downgrade by the rating agency will likely scare away investors interested in exploring the Ghanaian SME sector, due to surging interest costs on domestic debt and a prolonged lack of access to Eurobond markets which had been the country’s regular source of external financing.

“This poses some pressure on the SME sector. Even in times when we didn’t have such downgrading leading to the kind of rates that we now have in the past, the SME sector was having it difficult accessing credit: especially as government is taking about 80-90 percent – as reported by the Ministry of Finance – of banks’ portfolios available in the financial sector, in terms of investing in the bills and bonds of government. So, that rather worsens the case with the SMEs sector,” Prof. Gatsi stated.

Citing the Bank of Ghana’s Financial Stability report, he stressed that the propensity of the domestic SME sector to default to the financial sector is already higher than that of the international SME sector – posing a serious threat to growth.

“If the SME sector is becoming anaemic as a result of these developments, then the benefits we want to get from the African Continental Free Trade Area (AFCFTA) will be elusive. This environment doesn’t encourage the SME sector to be supported by the financial sector to deliver on its mandate in the country’s economic activities,” he stated.

The Executive Director of Ghana Startup Network, Solomon Adjei – who also spoke to the B&FT, said the development is not a good situation for SMEs and will likely derail efforts to attract both local and international investors to the sector.

The Executive Director for Ghana Startup Network, Mr. Solomon Adjei addressing the youth

“Ratings like this which paint a deficient and somehow gloomy economic situation to foreign investors make it difficult for them to come in. And that’s a cause for worry, and it’s a big blow,” he stated.

That notwithstanding, Mr. Adjei is optimistic SMEs will respond positively to the challenge and ensure that its effect doesn’t cripple the sector and economy at large.

Meanwhile, Trade and Industry Minister Alan Kyerematen reiterated government’s commitment to nurturing and developing the capacities of SMEs in areas of profiling, matchmaking and linkage to supply chains of large enterprises to be major players in AfCFTA despite challenges confronting the sector.

Speaking at a separate event – the West Africa Connect (WAC) 2022 in Accra – through Dr. John-Hawkins Asiedu-Technical advisor at the Trade and Industry Ministry, last Tuesday, Mr. Kyerematen said as the main actor in the country’s business space, the SME sector’s importance cannot be over-emphasised in the country’s economic development.

About 70 percent of all industrial establishments in the country are Micro, Small and Medium Enterprises – providing over 85 percent of manufacturing jobs and contributing to 70 percent of GDP.

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