SAS Research: Review of the 2020 Budget and Economic Policy

On Wednesday, November 13, 2019, Finance Minister Hon. Ken Ofori-Atta delivered a GH¢67.1 billion (+23% Year on Year) budget, with significant allocations to the fulfillment of the NPP government’s flagship programs (Free SHS, Road Infrastructure, Nation Builders Corp.) and a bouquet of subsidies in the form of personal reliefs for the populace and adjustment of tax bands.

SAS takes a review of the 2020 Budget and Economic Policy presented in Accra.

The revenue targets are quite ambitious with most revenue lines projected to record double-digit growth which we think is stretching.

Revenue risks include potential underperformance on income and property tax collection, and potential recession in the developed markets and lower consequent demand and prices of commodities (oil, cocoa, gold) in the world markets.

Total expenditure is budgeted to increase 21% to GH¢ 85.9 billion in 2020. While labor compensation costs can be predicted and managed well, there is significant room for overspending on capex in an election year.

Market uncertainties, particularly from offshore and the risks of portfolio reversal in an election year or due to global market factors (with higher interest costs) are extant.

There could well also be significant latent costs associated with the clean-up of the financial sector. Resultantly, without positive performance from revenue sources, there is considerable risk of government breaching the 5% fiscal deficit rule.

For the capital markets, the government’s borrowing plans to finance the 4.7% budget deficit present new investment opportunities for domestic and offshore investors.

The large increase in issuance size will likely keep yields stable or cause an upward trend.

While we are cautiously optimistic about growth prospects for economic output in 2020, with increased oil production expected to anchor forecast Gross Domestic Product (GDP) growth of 6.8% in 2020, the budgeted 21% increase in government spending is likely to be inflationary.

We [SASGhana] do not expect the MPC to begin to ease in the short-term.

The economy however, is projected to grow 6.8% in 2020 on the back of increased oil production and BOP surplus expected.

According to the Finance Minister, the Ghanaian economy grew 6.2% during the first six months of 2019 (higher than the 5.4% seen during the prior comparable period).

Government targets 6.8% growth for 2020, a slight moderation on the 7% growth projected for 2019.

YoY inflation which was 7.6% as at September 2019 is expected to close the year under 8%, and the central bank expects to maintain inflation within the 8 +/- 2% range in the medium term through its interventions.

On the external front, an overall balance of payments surplus of US$500 million is projected for the medium term, on the back of improved FDI inflows, increased oil output from new oil wells, among other stimulants.

This development is expected to strengthen the Cedi, but strength depends largely on the stability of commodity prices, among other factors.

Budget deficit of 4.7% of GDP very close to the fiscal deficit ceiling of 5% Total revenue and grants for 2019 has been revised downwards to GH¢54.6 billion (7.4% below target) resulting in a projected deficit of 4.7% of GDP.

For 2020, the government expects to collect GH¢67.1 billion in total revenue and grants, a 23% increase YoY, on anticipated improvements in tax compliance and effective revenue administration.

On the other hand, total expenditure (including arrears clearance) is expected to grow 21.2% YoY to GH¢85.9 billion (21.6% of GDP), driven largely by full funding of government programs (reflected in a 20% uptick in use of goods and services) as well as by one-off payments associated with the 2020 Presidential and Parliamentary elections.

A total of GH¢9.3 billion has been allocated towards Capital Expenditure in line with government efforts to deliver on the promise to improve the country’s road network.

The resultant overall budget deficit is projected to be GH¢18.9 billion (4.7 percent of GDP).

Given the revenue underperformance for the first 9 months of 2019 (86.4% performance), Government will focus instead on efficiency of already imposed programs and base broadening in 2020.

To achieve this, the government will:

Renew and extend the National Fiscal Stabilization Levy (5%) and Special Import Levies (SIL) (2%) for another five years (2020-2024).

Pursue non tax revenue inflows associated with the operations of some telecom companies and State-Owned Enterprises.

Adjust the personal income tax bands to exempt the 12% minimum wage increase from tax.

Review other personal reliefs such as marriage relief, child education relief and old age relief upwards.

The projected Budget deficit of GH¢18.8 billion is expected to be financed from local and foreign sources.

The government intends to finance the GH¢18.8 billion budget deficit in 2020 from domestic sources (GH¢8.2 billion, 2% of GDP) and from foreign sources (GH¢10.6 billion, 2.7% of GDP).

Ghana will borrow an additional US$3 billion in the international capital markets (US$1 billion of which will be used for domestic debt liability management) in 2020.

In 2019, Government continued to emphasize the re-profiling of the public debt balance by targeting the issuance of longer term, lower cost instruments, despite pressure from a slowdown in the global economy, exchange rate volatility and the financial and energy sector bailouts.

Government issued largely longer-term paper in the domestic market (with about GH¢1,490.0 million going towards contingent liabilities in the banking sector).

A total size of US$3 billion Eurobonds was issued in February, 2019, while a total of US$701 million in non-concessional loans was contracted in various sectors.

As at the end of September 2019, the nominal public debt stock was GH¢208,565.18 million (60.55% of GDP, slightly above the 60% target) with external debt of GH¢107,166.78 million and domestic debt of GH¢ 101,398.4 million.

Debt balances increased based on the need to provide bailout funds for the financial sector, as well as the depreciation of the Ghana cedi against major currencies.