Fitch downgrades Ghana from 'CCC' to 'CC'.

Fitch Ratings.

Ghana's Long-Term Local and Foreign-currency Issuer Default Ratings (IDRs) have been downgraded by Fitch Ratings from 'CCC' to 'CC'. For the most part, Fitch does not provide Outlooks to issuers with ratings of "CCC" or below. The rating action commentary concludes with a complete list of rating actions.

KEY RATING DRIVERS

Increased Probability of Debt Restructuring: Given escalating financial strain, rising interest rates on domestic debt, and a protracted absence of access to Eurobond markets, the downgrade underscores the increased possibility that Ghana would seek a debt restructuring.

Due to rising interest rates and fundamentally low revenue as a proportion of GDP, it is quite likely that the IMF assistance package presently under negotiation will call for some kind of debt treatment.

According to our criteria, we think this will take the form of a debt exchange and be a distressed debt exchange. Press allegations that Ghana is getting ready to discuss a restructure have neither been verified nor refuted by the administration. In addition to having lower interest rates than domestic debt, near-term foreign loan amortisations also seem reasonable.

However, we think there would be a motivation to divide the cost of a debt restructuring between domestic and foreign creditors, thus we do not yet have a solid foundation upon which to distinguish between foreign- and local-currency ratings.

High Debt Service, Financing Constrained: In 2021, interest expenses were 47.5% of revenue, and in 1H22, they were 54%. About 75% of all interest expenses are paid as interest on domestic debt. This is due to high domestic debt rates, which have increased as a result of monetary tightening brought on by the Bank of Ghana raising its policy rate to 22.0% from 14.5% in February and a 34% year-over-year increase in inflation as of August 2022. The 91-day Treasury Bill yield increased to 27.0% in August from 12.5% in August 2021, while the 10-year Treasury Bond yield increased to approximately 35% in September from about 20% in 1Q22.

Constrained Access to External Financing: Due to Ghana's anticipated continued exclusion from the Eurobond markets, which had been the nation's primary source of external financing, we anticipate that access to external financing will remain limited until at least an IMF programme is approved. In addition to a USD 250 million syndicated loan from international commercial banks, the government received a USD 750 million term loan from the African Export-Import Bank (BBB/Stable) this year. Additionally, it may utilise its sinking fund. In 2023, Ghana would likely have to pay roughly $3 billion in interest and amortisation to repay its foreign debt.

Continued Reserve Pressure: In the absence of an IMF programme, we anticipate ongoing downward pressure on reserves. From USD9.8 billion in 2021 to USD7.3 billion in June, official reserve assets decreased. The most recent data available shows that gross foreign reserves, excluding oil money and encumbered assets, totaled USD7.1 billion in March. So far, the exchange rate has fallen 40% against the US dollar, hitting GHC10:USD1 in September. The decline in non-resident investment in local-currency debt may have made the situation worse. At the end of August, non-resident holdings totalled GHC23.1 billion, or 4% of the 2022 GDP predicted by Fitch.

IMF Programme Pending: In July 2022, the government changed its long-standing stance against requesting assistance from the IMF, and we now think an agreement with the IMF is possible within the following six months. Ghana has said it may ask for $2 billion to $3 billion, and the scheme may enable more official lenders to provide budget help. But because the IMF is unable to provide funding when it determines a country's debt to be unsustainable, we think a restructure would be considered required, with local-currency debt treatment perhaps included prior to IMF clearance.

Ghana was deemed to be at a high risk of financial distress and sensitive to shocks to market access and high debt payment costs in the most recent IMF debt sustainability examination, which was completed in 2021. Since then, interest rates have significantly increased.

Limited Space for Fiscal Consolidation: We anticipate that low revenue and high borrowing costs will prevent budgetary restructuring. Based on the expiration of pandemic-related expenses and increasing domestic income generated by new levies, such as an electronic transaction fee, the medium-term fiscal framework in the 2022 budget predicted that the deficit would be reduced to below the 5% of GDP limit by 2024. In contrast to budget projections, implementation delays caused lower revenue and a bigger nominal deficit in 1H22. The government's tenuous hold on the majority in parliament may thwart efforts to impose new levies or hike tax rates.

Partially Guaranteed Note Could Be Excluded: We maintained the rating on the partly guaranteed note for Ghana, which is backed by the International Development Association of the World Bank, since it may be left out of a debt restructuring even if other Eurobonds are included.

ESG – Governance: In terms of political stability, human rights, rule of law, institutional and regulatory quality, and corruption control, Ghana has an ESG Relevance Score (RS) of "5[+]". The strong weight that the World Bank Governance Indicators (WBGIs) hold in our in-house Sovereign Rating Model is reflected in these ratings. Ghana's 53rd percentile WBGI score is medium, indicating the country's recent history of peaceful political transitions, a moderate degree of institutional capability, established rule of law, and a moderate level of corruption.

The willingness to service and repay debt is relevant to the rating and a rating driver for Ghana, as it is for all sovereigns, and the restructuring of Ghana's public debt in 2006 had a negative impact on the country's credit profile. As a result, Ghana has an ESG Relevance Score of "5" for Creditor Rights.

Source: ghananews.hrforum.uk