S&P affirms ratings on Republic of Ghana at 'B/B'

-- The Republic of Ghana benefits from strong GDP growth, strengthening oil production volumes, and a track record of political stability.

-- However, it continues to suffer from weak fiscal management highlighted by a widening of the fiscal deficit in 2010 and increased supplier arrears.

-- We are therefore affirming our 'B/B' foreign- and local-currency sovereign credit ratings on the Republic of Ghana.

-- The stable outlook balances our view of the country's strong growth prospects and track record of political stability against its weak payment culture and fiscal challenges.

Standard & Poor's Ratings Services said today that it affirmed its 'B' long-term and 'B' short-term sovereign foreign and local currency credit ratings on the Republic of Ghana. The outlook is stable. The transfer and convertibility (T&C) assessment remains at 'B+'.

The ratings on the Republic of Ghana are constrained by our view of the country's continued weak fiscal management, which has contributed to large fiscal deficits and supplier arrears. The ratings are also constrained by low economic development and--despite oil production commencing--a still-narrow economic profile. The ratings are supported by strong GDP growth, strengthening oil production volumes (which over the medium term will likely support improved fiscal and external balances), and a track record of political stability.

In our view, the government's weak payment culture and fiscal discipline continues to be highlighted by the net new accumulation in 2010 of further arrears amounting to 1.9% of GDP, raising the stock of arrears to an estimated 5.5% of GDP at year-end 2010. In addition, the fiscal deficit widened to 7.4% of GDP in 2010, from 6% in 2009. The government adopted a supplementary budget in mid-2011, which raised the planned 2011 fiscal deficit to 5.1% of GDP (from an initial target of 4.1%) and directed higher-than-expected revenues toward increased spending instead of aiming for a quicker reduction of the fiscal deficit or arrears. We expect the 2011 fiscal deficit to exceed the budget plan and reach 6% of GDP. Although improving, we continue to be concerned as to the extent of contingent liabilities that could crystallize from state-owned enterprises (SOEs) and the banking sector.

Nevertheless, receipts from the oil sector should begin to improve fiscal flexibility in the medium term, provided that spending can be contained. And, despite accumulating new arrears on its own account, the government has paid off a substantial portion of arrears owed by an SOE, Tema Oil Refinery (TOR), to Ghana Commercial Bank , a key player in the domestic banking sector.

The Petroleum Revenue Management Bill, passed in 2011, has added clarity to government oil receipts. Furthermore, Ghana is one of Africa's most established democracies, with both major parties having taken a turn at relinquishing power after losing elections. Even though the presidential election result was very close, in 2008 former president, Mr. John Kufuor, stepped down in strict adherence to the constitution, which allowed for a smooth transition of power.

However, we believe a firm and implementable commitment to fiscal consolidation is still to be demonstrated. In our view, looming elections could further erode fiscal discipline with forthcoming oil revenues possibly used as an excuse to ramp up spending even more. Pressure on government spending is heightened by intense popular demand to improve public services, and by spending pressures associated with the 2012 presidential elections that are, once again, likely to be close.

The Multilateral Debt Relief Initiative (MDRI) contributed to a significant reduction in Ghana's net external debt in 2006, but the public sector has been re-leveraging ever since; general government debt reached 38% of GDP at year-end 2010. A bilateral loan from China may lead to a further ramp up in debt over the next few years. The increase in the debt ratio would have been even higher absent the double-digit inflation that has boosted nominal GDP. In addition, this debt burden excludes domestic expenditure arrears and public-sector contingent liabilities stemming from the banking sector and government-owned enterprises. NPLs in the domestic banking sector rose from 16.2% at end-2009 to an estimated 17.6% at end-2010, before falling slightly to an estimated 17.2% in May 2011.

Despite oil production commencing, we expect the current account will remain in deficit over 2011-2014 in part because of oil-industry-related imports. We estimate that gross external financing needs stand at 108% of CARs and usable reserves in 2011. In our view, the emergence of the oil sector, along with good performance in Ghana's other key export sectors, should lead to strong real GDP per capita growth averaging 5% in 2011-2014.

In 2010, the Ghanaian government published the results of its GDP recalculation exercise. The recalculation has significantly increased the reported size of GDP.

Our local-currency rating is equalized with the foreign-currency rating because monetary policy options, which underpin a sovereign's greater flexibility in its own currency, are constrained by Ghana's relatively-less-developed domestic bond markets and fairly high inflation. Our T&C assessment is one notch above the foreign-currency sovereign rating to reflect our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Ghana-based non-sovereign issuers for debt service is slightly less than the likelihood of the sovereign defaulting on its foreign currency obligations. This balances the growing outward orientation of the economy against the country's continuing use of repatriation and surrender requirements and other exchange controls.

The stable outlook reflects our expectation of resilient GDP growth and of oil-related revenue supporting the balance of payments. The stable outlook also reflects our view that fiscal management and discipline will not improve significantly in the run-up to the elections.

Downward pressure on the ratings could arise if the fiscal situation deteriorates further and the planned reductions in supplier arrears are not implemented. Conversely, prudent use of oil revenues, continued reductions in the fiscal and external deficits, and payment of arrears could support a higher rating level.

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