Continuous rating downgrades could dampen investors’ appetite for Ghana and further tighten access to credit for businesses, economist and president of Africa Investment Group Dr. Sam Ankrah has said.
The country’s credit situation has been a source of concern for businesses for some time, particularly issues concerning cost and availability. For instance, the central bank’s policy rate – the rate at which Bank of Ghana lends to commercial banks – is 24.5 percent. The average lending rate, meanwhile, is more than 30 percent.
And after Fitch, Moody’s and Standard & Poor’s all downgraded the country’s creditworthiness to junk status in recent weeks, he said the tightening credit condition will not be helped by these negative ratings.
“Continuous rating downgrades will translate to unaffordable debt costs, deteriorating asset values (such as retirement, other savings and property) and reduction in disposable income for many, as well as high cost of funding for the country when there is inherent core inflation and deterrence of foreign investment coming into the country.
“This will translate to expensive borrowing for businesses.” he told the B&FT.
Given that investment decisions are taken based on data and sentiment, Dr. Ankrah noted that the downgrades could also weaken the country’s appeal as a preferred investment destination in sub-Saharan Africa.
The downgrades reflect not only Ghana’s rising public sector debt of 68 percent to GDP at July ending, but also the possibility that government will no longer be able to raise money from the international capital market in the near future.
The prospects of not being able to tap into the international market, Dr. Ankrah explains, leaves government with no option other than to compete with the private sector for already scarce funds from the domestic market.
“Businesses should be prepared for every eventuality, and aware of the risks from overextension, when borrowing in an environment conducive to rising rates. With an increase in interest rates, businesses with company existing loans can have higher interest payments, less disposable income and bigger overheads. In some cases, the business may end up paying off the interest only rather than the loan itself,” he added.
Higher interest rates, he said, can impact small businesses’ cash flow and their ability to borrow, reinvest and even hire workers.
Typically, these economic downgrades cut sovereign bond value as collateral in central bank funding operations and drive interest rates high. Sovereign bond values are grossly discounted, at the same time escalating the cost of interest repayment instalments and ultimately contributing to a rise in the cost of debt.
A wave of corporate downgrades also follows because of the sovereign ceiling concept – a country’s rating generally dictates the highest rating assigned to companies within its borders.
Meanwhile, on how these negative ratings could impact the economy, Minister of Finance Ken Ofori-Atta acknowledged the difficulties faced by the country in raising money from the international capital market due to the downgrades.
“Returning to the International capital market is going to take a bit of time. It will take about two or three years to work on our ratings. The recent downgrade is very unfortunate,” he said.
Way forward
Government is currently engaging the International Monetary Fund (IMF) on a bailout programme, which Dr. Ankrah believes could offer a temporary reprieve.
To him, an effective strategy would be for government to seek more homegrown solutions such as an aggressive export drive and extreme prudence regarding expenditure, while seeking innovative sources and new streams of income.
“Government will have to bite the bullet and cut down expenditure, even consider retrenchment. But the number-one culprit is ‘free education’. This has to be reviewed. Expenditure on large urban projects should be postponed. Emphasis should be on opening up goods and raw material producing areas with good roads, rail etc.,” he advocated.
Dr. Ankrah, who is a fellow of Chartered Institute of Economists-Ghana, further stated that reliance on increased taxes is not the way to go, as it only tightening an already tough business environment.
