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The global rating agency, Moody’s Investors Service, has downgraded the Government of Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable from negative.
According to the rating note, the downgrade to Caa1 reflects the increasingly difficult task the government faces addressing its intertwined liquidity and debt challenges.
Ghana’s sovereign dollar bonds dropped on Monday. Bonds fells across the curve with the 2051 bonds tumbling as much as 1.8 cents in the dollar to trade at 71.678 cents, Tradeweb data showed.
Weak revenue generation constrains the government’s budget flexibility and tight funding conditions on international markets have forced the government to rely on costly debt with a shorter maturity, the rating note shows.
Moody’s estimates that interest payments will absorb more than half the government’s revenue over the foreseeable future, which is exceptionally high compared to peers at all rating levels.
As a remedy, the global rating firm hint that the government has proposed sharp fiscal consolidation and a switch to borrowings from external partners on more favourable terms.
However, the strategy comes with sizeable implementation risks, especially in a still-fragile post-pandemic environment and while international market creditors price in very wide risk premia, it added.
“While Ghana’s external buffers and moderate external debt amortization schedule in the next few years afford the government a window of opportunity to deliver on its strategy, balance of payments pressures will build up the longer government’s large financing requirements have to rely on domestic sources”.
The stable outlook balances Ghana’s significant fiscal challenges, large refinancing needs and constraints on access to funding against the government’s pre-pandemic track record of relatively effective policy delivery and maintenance of a variety of funding sources, according to Moody’s.
It noted that Ghana’s institutional framework and dynamic economy remain key credit supports, with economic growth forecasts of around 5% over the medium term. Read: Fitch Downgrades Ghana as Accra Lost Access to Eurobond Market
Concurrent to the rating downgrade, Moody’s has also downgraded Ghana’s bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) to B3 from B1, reflecting a blended expected loss now consistent with a one-notch uplift on the issuer rating. Also, Moody’s has lowered Ghana’s local currency (LC) and foreign currency (FC) country ceiling to respectively B1 and B2 from Ba3 and B1.
The rating firm projects that Ghana’s government debt ratios will continue to deteriorate in the next few years with extremely weak debt affordability significantly constraining policymaking.
Moody’s estimates that government debt ended 2021 at 80% of GDP while interest payments alone consumed half of the government revenue that year (positioning Ghana with the second-largest ratio among Moody’s rated sovereigns).
It cited Ghana’s low average income at about $6000 per capita at Purchasing Power Parity and demands on social spending, very weak debt affordability constrains the government’s scope of policy action, intensifying the policy trade-off between servicing debts and delivering services to the Ghanaian population.
Moody’s projects that the government will improve its primary balance by a cumulative 3% of GDP over 2022-24. The government own fiscal consolidation plan presented in November 2021 sets more ambitious targets, supported by new revenue measures worth 3% of GDP, some of which have since been opposed in Parliament.
Ghana has announced a 20% cut in primary spending, equivalent to a 4% cut on a year-on-year basis or 16% in real terms, to compensate for any shortcoming in the government’s revenue measures package. Such an unprecedented fiscal tightening will be socially, economically, and politically challenging to implement.
Moreover, Moody’s factors in further fiscal pressure from interest payments in the short term as the deterioration in funding conditions recently observed is unlikely to reverse until the government demonstrates to investors that significant fiscal consolidation is underway.
The rating note reads that both domestic and external factors underpin Moody’s assumption that debt costs will remain high, including high inflation (at 12.6% most recently) and Moody’s expectation of tighter monetary policy globally.
Ghana’s borrowing needs remaining elevated, at around 30% of GDP annually, mean higher borrowing rates will quickly translate into higher interest costs. Ultimately, Moody’s expects that a higher interest bill in 2022 and 2023 will offset the improvement in the government’s primary balance, thereby maintaining double-digit fiscal deficits (in cash terms) with a concomitant increase in the government’s debt burden.
WEAKER GOVERNMENT LIQUIDITY POSITION
The government of Ghana’s capacity to access sufficient funding sources at manageable costs to meet large funding needs has deteriorated. The government’s external funding options have narrowed and, for the time being, appear limited to official sector sources or financing secured with the support of the official sector.
This implies a greater reliance on domestic borrowing, primarily sourced from the banking sector at a cost that has recently increased to high levels. Ghana fiscal reserves, including in the various petroleum funds remain very small and therefore not suited to provide funding in times of stress.
Ghana’s constraints on external funding come at a time when external debt service requirements in foreign currency are contained, thereby limiting short-term government liquidity risks.
Foreign exchange reserves at $9.3 billion as of October 2021 according to the IMF (equivalent to 8 months of imports) provide a buffer to meet external debt flows.
However, over the medium term, the government’s external liquidity profile will likely erode unless Ghana is able to restore its access to a wider range of external borrowing sources, including international markets. This, in turn, will rely on the ability of the government to demonstrate a track record of delivering on its fiscal consolidation objectives.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances Ghana’s significant fiscal challenges, large financing needs and funding constraints against the government’s pre-pandemic track record of relatively effective policies and maintenance of a variety of funding sources.
On the downside, the constraints to policymaking posed by interest payments absorbing such a large proportion of the budget, risk undermining growth and, over time, social stability.
However, while the capacity of the government to reduce its borrowing needs is limited, in 2022-23 refinancing will be primarily for local currency debt, providing a time window for the government to deliver on its fiscal consolidation strategy and engender confidence that may restore its access to a broader range of external funding sources.
Meanwhile, Ghana’s institutional framework and dynamic economy remain key credit supports. The government built a track record of meeting fiscal targets in the years preceding the pandemic-related shock in 2020, managing to consolidate its primary balance by 4.5% of GDP between 2016 and 2019.
Improvements to Ghana’s personal and property tax systems and customs will likely continue and help the government in its efforts to improve tax compliance. Finally, the country’s strong growth potential from multiple sources both in the oil and non-oil sectors underpins Moody’s expectation for growth in the range of 4.5-6% over the medium term.
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