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| 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
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