Fitch Ratings, an international rating agency, says the Bank of Ghana (BoG) financed 2.1 percent of GDP in Government’s budget deficit for the first quarter of this year.

It said the funding provided by BoG, which was equivalent to 10 percent of government revenue, was twice BoG’s own full-year limit.

Making this known in a recent report it issued in London, Fitch highlighted financing challenges Government faces in allowing the Bank of Ghana (BOG) to fund its budget deficit, adding that the situation could only result in surging yields and a deteriorating maturity profile on government bonds.

“Printing money to finance the deficit will aggravate already high inflation (14.7 percent in April 2014) and contribute to further cedi weakness.

Mentioning that the cedi has declined by 21 percent since the start of the year, it said fiscal and external vulnerabilities have mounted in Ghana reflected in rising bond yields and cancelled bond auctions, as market participants appear increasingly wary.

It stated that non-banks, usually among the largest purchasers of government paper, became net sellers in the first quarter of 2014.

Fitch also pointed out that the yields on three- and six-month treasury bills, which made up 25 percent of domestic debt in 2013, have surged in recent months, with yields rising 520 basis points to 24.07 percent between November 2013 and June 2014.

Government did not issue as planned five- and seven-year bonds in March and May respectively due to punitive rates.

Take on new Eurobond sale

“It said Ghana plans to move ahead with a new Eurobond and has hired advisers to raise as much as $1.5 billion, but attracting dollars to fund the current account and budget deficits looks increasingly challenging.

“A successful issue might ease immediate external financing pressures, but the cost would likely be high.”

Fitch expects rising interest costs and weaker revenue growth on the back of rising macroeconomic uncertainty to push the budget deficit over 10 percent of GDP – the third consecutive year of double digit budget deficits and above the government’s target of 8.5 percent.

The agency said the foregoing, combined with the steep depreciation of the cedi, will see the country’s debt jump again to 61 percent of GDP by the end of 2014 from 58.2 percent at end-2013.

Debt financing challenges

Debt servicing costs have also risen steeply to an estimated 6 percent of GDP in 2014 from 3.3 percent of GDP in 2011, adding to the intractable nature of Ghana’s fiscal position.

External financing conditions will remain extremely tight over the coming months. Foreigners held 21 percent of domestic debt at end-2013 down from 26 percent in 2012.

Of this, roughly one quarter was due to mature by the end of this month.

“With some recent auctions suggesting foreigners’ unwillingness to roll-over existing debt, this could see a further outflow of funds adding to pressure on the cedi.

Further stress might arise from Ghanaian banks repaying dollar loans taken out during 2013, and there are potential risks of further dollar outflows if the BoG were unable to roll over swap facilities and loans.”

Gross external financing requirements, net of FDI, stand at roughly 70 percent of reserves. Reserves were $4.7 billion in March 2014, a fall of $900 million over the quarter, and just 2.3 months of current external payments.

Fitch placed Ghana’s ‘B’ IDR on Negative Outlook in March 2014, highlighting deteriorating external and fiscal balances.

The next scheduled rating review will be on 26 September 2014.