We visited Ghana to better understand the country’s fiscal outlook. Despite recent curbs to government spending, the picture that emerged was concerning. Most measures, such as cuts in ministers’ and top officials’ salaries, have not had a significant impact, nor will a ban on car imports by government ministries. Secondly, politically sensitive and non-discretionary expenditures, like wages for public-sector employees and interest payments, accounts for 53-55% of total expenditures.

This leaves transfer payments and capital expenditure as the main expenses that the government can cut or delay. But cutting transfers at a time when the country is getting back on its feet after a pandemic could increase social discontent. Some transfers, like school vouchers, are statutory (i.e. linked to specific taxes) so not easy to cut, and lowering capex impacts growth. The recently-approved e-levy will not raise revenues by much.

An IMF program would be one solution to rein in the deficit, but the government vehemently opposes this. Instead, it appears to be considering a US$2 billion syndicated loan.

To date, Ghana’s budget deficit has mostly been financed by domestic investors. But bond yields have risen in recent months and a 2.50% increase in the Bank of Ghana (BoG)’s policy rate, to 17%, in March has made local financing even more onerous. Uncertainty also exists over the local market’s capacity to absorb more debt. Banks have been buying local bonds but this has created a “crowding out” problem that is affecting growth. Recent data from the BoG indicates that activity is stalling.

The BoG impressed all of us with its commitment to its inflation target. Its monetary policy committee met earlier than scheduled in March, right after a 15.7% inflation reading for the 12 months to February was published. This reading implied that the bank’s real policy rate had turned negative for the first time in years, and prompted it to raise rates from 14.5% to 17%. Bank staff highlighted how rising commodity prices had triggered an increase in inflation and that they wanted to avoid second-round effects. To lower inflation, they said they were aiming to keep aggregate demand in check, hence the increase in the policy rate.

One of us asked whether it would be helpful for the BoG to be lenient in its anti-inflation stance, to lower the government’s financing costs. But staff were vocal in rejecting this approach and said that their resolute stance could be an incentive for the government to act on the fiscal front. They also stated that a repetition of the monetary financing of government in 2020, to the tune of GHS10 billion or 1.5% of GDP, is not on the cards (my view: “Never say never”).

The Ghanaian cedi’s depreciation is partly controlled by the BoG’s deployment of its foreign currency reserves, and BoG staff seemed comfortable with reserves at their current levels, of around US$9.5 billion.

One third of imported fertilizers comes from Russia, and higher fertilizer prices will not only widen the current account deficit but also impact agricultural production. Nevertheless, Ghana’s current account is only expected to widen to 4.2% of GDP this year, compared to a previous forecast of 3.7%.

Investment conclusion: This visit did not change our outlook for Ghana. At best, the country can muddle through 2022 because the government has no major foreign-currency redemptions coming up. But the fiscal outlook remains precarious, and it appears that the authorities will only negotiate an IMF program when they see no alternative. Until then, the Ghanaian government’s financial position will probably continue to deteriorate, especially given the current global environment. We see little scope for improvement so, even at current bond prices, our current underweight allocation to Ghanaian bonds is appropriate.

Kenya’s economy has rebounded strongly after the pandemic. Its government agreed on an Extended Fund Facility (EFF) program with the IMF in the summer of 2020 but that program is backloaded, in my view (more on this below). The government’s budget deficit was 8.2% of GDP in fiscal 2020/21 and is expected to reach 8.1% of GDP in the current fiscal year. Debt/GDP of around 67% identifies Kenya as being “at high risk of debt distress,” according to the IMF. The authorities forecast Kenya’s current account deficit to widen from 5.4% in fiscal 2020/21 to 5.9% of GDP this fiscal year, despite strong remittances and an improved tourism outlook.

In our meetings with the authorities, however, we did not detect any urgency to address these macroeconomic imbalances. The reason is simple: elections are scheduled for August 2022.

Rising commodity prices have impacted Kenya and, while inflation remains contained, the effects on its government budget and current account could be significant. Fuel prices have crept up recently, after government subsidies had kept them stable since October 2021. The government also subsidizes fertilizer, and more subsidies could be in the pipeline. One of our interlocutors mentioned a potential expenditure increase of one percentage point of GDP due to an increase in subsidies before the end of fiscal 2021/22.

Likewise, Kenya’s current account deficit is at risk of unexpected widening. The country is an oil importer and imports most of its fertilizer from Morocco. Morocco, in turn, depends heavily on Russian inputs for its fertilizer production. The risk of not importing the usual amount of fertilizers, which would negatively impact agricultural production, is non-negligible. On a positive note, American vaccine firm Moderna is planning to open a US$500 million pharmaceutical plant in the country.

So far, local investors and concessional finance have met most of the Kenyan government’s financing needs. Bank of Kenya is increasingly involved in strengthening the local bond market, but it does not appear keen to attract more foreign investors to the local market: “We are happy with the absence of foreign investors,” we were told.

As for financing the deficit in coming months: the authorities mentioned that the World Bank has agreed to disburse a US$750 million loan in respect of the current year’s budget and that the government plans to raise another US$1.2 billion in international markets. It is unclear whether the government will tap international markets by issuing a Eurobond or by negotiating a syndicated loan.

As mentioned above, the IMF’s EFF program in Kenya is backloaded. The Fund’s review last December projects major fiscal adjustment in fiscal 2022/23 and 2023/24, when “unidentified tax policy measures” should be implemented, worth 0.9% and 0.8% of GDP, respectively. Yet, we heard nothing, in our meetings, about what these measures might entail. The authorities’ sense of complacency was palpable, in my view.

Investment conclusion: Kenya’s authorities are avoiding major adjustments ahead of a general election in August 2022. It remains to be seen what measures, if any, it will take after the elections. For now, our underweight position in Kenyan bonds is appropriate, given current prices.

We visited Zambia to evaluate progress in applying the G20 Common Framework for Debt Treatments beyond the DSSI (Debt Service Suspension Initiative), for the first time in a country that also has Eurobonds outstanding. Staff-level agreement was reached in December 2021. The authorities are aiming at IMF Board approval, by June, of a US$1.4 billion program, equal to Zambia’s IMF quota. However, this target looks increasingly ambitious given the unclear position of Chinese creditors. Negotiations could therefore drag on a while, prolonging the current uncertainty.

Our most relevant takeaway was the more helpful attitude of Zambia’s new government officials, after the opposition victory in last August’s elections. There could scarcely be a bigger difference, compared to the previous administration. Officials are more open, focused and willing to engage with the country’s creditors.

Another example of major change in the government’s stance is its treatment of the mining sector. Long gone are the days of constantly changing tax rates and regulation in the copper sector, which prevented investment in this key economic sector. Representatives of the mining sector declared themselves delighted with the new situation, and investments should be forthcoming. That expenditure would provide a welcome boost to the Zambian economy, which the authorities forecast to grow at a low 3.4% this year.

The government also linked fuel prices to international prices in December 2021, with a monthly adjustment, and it will reintroduce fuel taxes, which were removed last summer. The authorities are revising fertilizer subsidies, which have been a major drag on its budget in recent years. And they are working on raising fuel taxes, planning to increase them by one percentage point of GDP, from the current 8.2%.

As a result of these improvements, the government’s deficit should be contained to 2.3% of GDP this year, compared to 3.5% last year. (One should factor in Zambia’s default on its external debt last year.)

Unsurprisingly, Bank of Zambia (BoZ) highlighted the inflationary risk of oil prices during our visit. Its officials appeared confident about the bank’s reserves, at US$2.8 billion, but they recognized the volatility of the Zambian kwacha’s exchange rate as a concern. Interestingly, they mentioned that foreign investors have returned to the local bond market and now hold 28% of the Zambian government’s domestic debt.

The impact of rising food prices on Zambia should be contained, as the country is self-sufficient. Clearly, rising prices for oil imports will have an impact. But there should not be a shortage of fertilizer this year, since the country has already purchased what it needs from Saudi Arabia. According to the authorities, the weather is a more important factor in determining the country’s agricultural output.

Investment conclusion: Zambia’s outlook remains uncertain, but the authorities’ change in attitude and their commitment to finalizing an IMF agreement is commendable. Zambia is a credit worth watching, with a potentially positive trajectory. We are comfortable with our positions in this issuer’s bonds, given our expectation that their recovery value could be higher than current prices.