Exchange markets create distortions

Business News of Friday, 3 October 2014

Source: Daily Guide

Dr Henry Kofi Wampah BoG

Fitch, an international rating agency, expects Ghana’s reserves to face pressure early next year due to seasonal demands for foreign exchange if an International Monitoring Fund (IMF) deal is not reached.

Fitch, in its report, said the parallel exchange markets were creating distortions in the domestic economy and exacerbating the shortage of dollars.

Fitch forecast that the current account deficit would narrow to 10.1 percent of Gross Domestic Product (GDP) in 2014 from 12 percent in 2013 due to falling imports as the sharp depreciation of the Ghanaian cedi suppresses import demand.

It said the onset of domestic gas production from the Jubilee oil field, which would offset more expensive crude oil imports used in power plants, could improve the outlook for the current account deficit.

Ghana’s weak fiscal and external positions are the key rating weaknesses and are adversely impacting macro-economic stability, Fitch said.

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GDP growth is expected to move to 6.1 percent in 2014 from 7.1 percent in 2013 although significant downside risks remain if Ghana’s fiscal and external challenges intensify, it indicated.

“Two years of double-digit deficits, combined with a cumulative 45 percent depreciation of the currency since January 2013, has seen debt jump to 61.7 percent of GDP in 2013, based on Fitch’s calculations from 39 percent in 2011-well above the ‘B’ median of 43.7 percent,” the agency said.

It said Ghana’s weaker growth outlook over the next two years would complicate fiscal consolidation.

Fitch recently affirmed Ghana’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B’ with negative outlooks.

The ratings are supported by Ghana’s strong governance record and democratic history, highlighted by the peaceful transfer of power in 2012 and respect for judicial due process.

“Ghana’s business environment compares favourably even with ‘BB’ median countries, this is reflected in Ghana’s ability to attract foreign direct investment, which at 7 percent of GDP is well above Nigeria, Gabon, Zambia, Kenya and Angola.”

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