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25 November 2021

2022 Budget Analysis

In brief

  • Ghana’s investors are not likely to raise a toast to the country’s 2022 budget proposal as it fell short of expectation
  • The steep sell-off in Ghanaian bonds which followed the budget reading is a testament of how unimpressed investors were
  • The budget was unable to convince markets on a clear-cut path to fiscal consolidation, even though projections see fiscal deficits ebbing over the medium term to settle just below the threshold of 5% of GDP as stipulated in the Fiscal Responsibility Act (FRA)
  • In our opinion, Ghana’s fiscal consolidation proposal as contained in the 2022 budget may be difficult to achieve due to the ambitious tax assumptions and the absence of stringent spending caps to check cost pressures
  • Given the unfolding high-yield environment, higher borrowing costs may be another layer of burden to the country’s purse as plans are still in place to take on more local (5.6% of GDP) and foreign (0.9% of GDP) debts in the coming year
  • The widespread negative market sentiment on Ghanaian bonds, which has pressured bond prices and sent yields soaring would play a major role in determining the success of Ghana’s debt issuances in 2022
  • As global policy normalisation looms large, we opine that the Bank of Ghana can better target liquidity injection in the fixed income market by lowering its Cash Reserve Ratio (CRR) requirements to release liquidity to the banking system to trigger a repricing of Ghanaian bonds.
  • This will not only soothe pressures from the cost of borrowing on future issuances, but the liquidity-induced rally can re-ignite foreign investors’ interest in Ghanaian bonds. However, it is also likely to result in further inflationary and exchange rate pressures in the near term, which will require the central bank to raise its benchmark interest rate further