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Research Update

:

Ghana Outlook Revised To Negative On Fiscal Slippage And External Risks; 'B/B' Ratings Affirmed
Primary Credit Analyst: Marie-France Raynaud, Paris +33 (0)1 44 20 67 54; marie-france.raynaud@standardandpoors.com Secondary Contact: Ravi Bhatia, London (44) 20-7176-7113; ravi.bhatia@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List

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Research Update:

Ghana Outlook Revised To Negative On Fiscal Slippage And External Risks; 'B/B' Ratings Affirmed
Overview
• Ghana faces large fiscal and external financing needs, based on its general government fiscal deficit, which ballooned to 11.8% of GDP in 2012 against an initially budgeted 4.8% of GDP, and which will likely fall only slightly to 10.4% of GDP in 2013 and consolidate slowly thereafter. • Nevertheless, political stability, strong growth prospects, and foreign investment support Ghana's credit profile. • We are revising our outlook on Ghana to negative from stable and affirming our 'B/B' long- and short-term foreign and local currency sovereign credit ratings. • The negative outlook indicates at least a one-in-three possibility that we could lower the ratings on Ghana within the next 12-18 months, due to its weakening fiscal and external profile.

Rating Action
On Dec. 6, 2013, Standard & Poor's Ratings Services revised its outlook on the Republic of Ghana to negative from stable. At the same time, we affirmed our 'B' long-term and 'B' short-term foreign and local currency sovereign credit ratings on Ghana.

Rationale
The outlook revision follows the deterioration we see in Ghana's fiscal and external position. The ratings are mainly constrained by the government's weak fiscal stance in terms of deficits, debt stocks, and interest burden. External vulnerabilities and still-low economic development are additional rating weaknesses. Ghana's track record of political stability, strong GDP growth, and favorable oil and gas production prospects support the ratings. We expect a limited, very gradual fiscal adjustment over the next three years. Ghana's general government fiscal deficit ballooned to 11.8% of GDP in 2012, against an initially budgeted 4.8% of GDP. We forecast that it will fall to 10.4% of GDP in 2013 and decrease to a still-high 7% by 2016. We consider that the government's high wage bill, partly linked to the introduction of a

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Research Update: Ghana Outlook Revised To Negative On Fiscal Slippage And External Risks; 'B/B' Ratings Affirmed

"single-spine salary scheme" that aims to offer the same salary for the same position across government, will continue to constrain fiscal flexibility. Related wage arrears accrued in 2012 and 2013 will burden public expenses, as will significant transfers to statutory entities and high interest costs. On the revenue side, uncertainties regarding the size of tax-free allowances for up-front investment by oil exploration companies point to possible downside risks on projected oil tax receipts. We also believe that the measures in the government's 2014 fiscal program--such as increasing value-added tax (VAT) rates, improving tax collection, and cutting fuel subsidies--will not be enough to offset higher cash wage expenditures. Furthermore, we believe that some measures proposed in the 2014 budget program are designed to shift expenditures off-budget rather than to improve spending efficiency. High fiscal deficits account for the increase of Ghana's net general government debt (net of liquid assets) stock to an estimated 49% of GDP this year and 56% of GDP in 2016, from 20% of GDP in 2006 (when Ghana received substantial debt relief). At year-end 2012, Ghana's general government debt stock was 53% denominated in its currency, the cedi, with 47% denominated in foreign currency. The foreign currency debt is mostly extended by official lenders at low concessional rates, while the cedi-denominated debt carries high interest rates. About half of the cedi-denominated government debt was held by local banks and pension funds at year-end 2012, a quarter by non-residents, and another quarter by the central bank. We believe that the government will try to meet its gross borrowing requirement mainly through more multilateral and bilateral borrowing (including from Chinese public-sector financial institutions), new Eurobond issuance, and domestic issuance. In addition, the government is trying to lengthen the yield curve and refinance expensive debt, as well as relaxing the restriction on non-resident participation in the short end of the domestic government debt market. Nevertheless, financing conditions may be tighter, in our view. In the context of current U.S. tapering, we see a risk that foreign investors might choose not to roll-over cedi-denominated debt. We forecast Ghana's ratio of interest to revenues to exceed 15% over 2013-2016. Ghana shows vulnerabilities on its external account, in our view, partially owing to its fiscal stance. On balance, we estimate that gross external financing needs will average 122% of current account receipts and usable reserves in 2013-2016, while reserves will cover less than three months of current account payments. Despite the start of oil production in 2010, Ghana's current account deficit widened in recent years to 10.5% of GDP in 2011-2012 from 6.5% of GDP in 2004-2008. We think this deficit will average of 12% of GDP in 2013-2016, because of significant oil and gas-industry-related imports but also owing to consumer goods imports. We forecast that Ghana's real GDP growth will remain robust and higher than 7% in 2013-2016. Real GDP growth should benefit from high FDI inflows in the off-shore oil and gas sector, and from public investment in infrastructure,

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Research Update: Ghana Outlook Revised To Negative On Fiscal Slippage And External Risks; 'B/B' Ratings Affirmed

notably in energy. The improvement we expect in energy provision should support private domestic investment. Still, high lending rates will constrain private domestic investment. The cedi floats, which helps the economy adjust to movements in terms of trade and other external shocks. However, we see the credibility of the Bank of Ghana's monetary policy as limited. Inflation has averaged 12% during the past decade, and the Bank of Ghana's direct financing of the fiscal deficit is rising. In addition, the transmission of central bank monetary policy through Ghana's banks is weak, due to the low level of monetization and the Bank of Ghana's limited available tools. Having introduced multiparty democracy 20 years ago, Ghana is now one of Africa's most established democracies, with both major parties having taken a turn at relinquishing power after losing elections. The opposition has accepted the Supreme Court's August ruling on the latest presidential elections, confirming the victory of President Mahama and consequently strengthening the current government.

Outlook
The negative outlook indicates at least a one-in-three possibility that we could lower the ratings on Ghana within the next 12-18 months, due to its weakening external and fiscal profile. We could consider lowering the ratings if Ghana's ability to fund its external financing requirement or to rein in government spending does not match our current expectations. An adverse terms-of-trade shock or unexpected delays in Ghana's offshore oil production coming on line could also prompt a negative rating action. We could affirm our ratings on Ghana and change the outlook to stable if the country's dynamic GDP growth--supported by oil and gas output and a favorable investment climate--yielded a better outcome than we currently anticipate on the fiscal and external fronts.

Key Statistics
Table 1

Republic of Ghana - Selected Indicators
2006 Nominal GDP (US$ bil) GDP per capita (US$) Real GDP growth (%) Real GDP per capita growth (%) Change in general government debt/GDP (%) 20 930 4.6 1.9 (14.5) 2007 25 1,099 6.5 3.7 9.9 2008 29 1,234 8.4 5.7 8.7 2009 26 1,097 4.0 1.4 9.3 2010 32 1,326 8.0 5.5 9.5 2011 40 1,594 15.0 12.4 10.4 2012 41 1,605 7.9 5.6 13.1 2013e 42 1,634 7.4 4.9 12.4 2014f 46 1,715 7.5 5.1 12.0 2015f 52 1,914 7.5 5.1 11.0 2016f 60 2,174 7.0 4.6 10.0

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Research Update: Ghana Outlook Revised To Negative On Fiscal Slippage And External Risks; 'B/B' Ratings Affirmed

Table 1

Republic of Ghana - Selected Indicators (cont.)
General government balance/GDP (%) General government debt/GDP (%) Net general government debt/GDP (%) General government interest expenditure/revenues (%) Other dc claims on resident non-govt. sector/GDP (%) CPI growth (%) Gross external financing needs/CARs +usable reserves (%) Current account balance/GDP (%) Current account balance/CARs (%) Narrow net external debt/CARs (%) Net external liabilities/CARs (%) (4.7) 26.2 20.0 12.3 13.5 10.9 105.4 (5.1) (14.0) 15.6 17.1 (5.6) 31.0 20.2 9.8 17.3 10.7 111.7 (8.6) (25.9) 41.8 54.7 (8.5) 32.5 24.0 12.1 18.8 16.5 130.4 (12.4) (37.8) 40.2 73.8 (6.0) 36.1 31.0 15.0 18.3 19.3 115.1 (6.2) (16.4) 37.7 87.2 (7.4) 38.2 33.1 16.3 16.6 10.7 111.6 (8.2) (22.3) 46.2 106.5 (4.1) 39.8 35.7 12.5 16.7 8.7 109.6 (9.0) (20.5) 31.5 91.9 (11.8) 45.7 43.0 15.2 18.7 8.8 112.1 (12.1) (25.5) 37.2 104.3 (10.4) 51.4 49.2 15.6 22.2 11.3 115.5 (13.4) (26.9) 46.5 121.9 (9.0) 54.9 53.0 15.1 22.5 10.0 123.5 (13.0) (25.2) 51.6 133.0 (8.0) 56.6 55.0 15.8 23.9 9.5 125.5 (11.7) (22.1) 51.1 133.8 (7.0) 57.2 55.9 16.2 23.3 9.5 123.6 (10.1) (18.4) 46.0 127.0

Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. e--S&P estimate. f--S&P forecast. The data and ratios above result from S&P’s own calculations, drawing on national as well as international sources, reflecting S&P’s independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Related Criteria And Research
Related Criteria
• Sovereign Government Rating Methodology And Assumptions, June 24, 2013 • Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 • Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research
• Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the

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Research Update: Ghana Outlook Revised To Negative On Fiscal Slippage And External Risks; 'B/B' Ratings Affirmed

recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.

Ratings List
Ratings Affirmed; Outlook Action To Ghana (Republic of) Sovereign Credit Rating Transfer & Convertibility Assessment Senior Unsecured
Additional Contact: SovereignEurope; SovereignEurope@standardandpoors.com

From B/Stable/B

B/Negative/B B+ B

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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