Credit rating agency Moody’s has downgraded Ghana’s credit rating further to Caa2 from Caa1 over concerns of debt default.
Moody’s on September 30, 2022 said this
"reflects the recent macroeconomic deterioration, further heightening the
government's liquidity and debt sustainability difficulties and increasing the
risk of default".
It added that, "the initiation of the
review for downgrade is prompted by the ongoing negotiations between the
government and the IMF over a funding programme that may include a condition
for debt restructuring to ensure debt sustainability" and that "such
a restructuring would likely be considered a distressed exchange and thereby a
default under the rating agency's definition. The review will evaluate the
likelihood of a debt restructuring being a prerequisite to secure sufficient
and durable financing from official sources to avert a fiscal and balance of
payments crisis that is already unfolding".
It may be recalled that Fitch downgraded the country from B- to CCC.
"There is a high
likelihood that the IMF support programme currently being negotiated will
require some form of debt treatment due to the climbing interest costs and
structurally low revenue as a percentage of GDP," Fitch
said in the rating action commentary.
Read Moody's entire
ratings below;
Rating Action: Moody's downgrades Ghana's rating to Caa2 and places it on
review for downgrade 30 Sep 2022
Paris, September 30, 2022 -- Moody's Investors Service ("Moody's")
has today downgraded the Government of Ghana's long-term issuer and senior
unsecured debt ratings to Caa2 from Caa1 and placed the ratings on review for
downgrade. Moody's has also downgraded the senior unsecured MTN programme
ratings to (P)Caa2 on review for downgrade from (P)Caa1.
The rating downgrade to Caa2 reflects the recent macroeconomic deterioration,
further heightening the government's liquidity and debt sustainability
difficulties and increasing the risk of default. Despite Ghana's tightening of
monetary policy in response to the global price shock, inflation continues to
rise from high levels and the currency has been under very significant
pressure. Combined, a sharp rise in interest rates, high inflation and a
rapidly weakening currency exacerbate the government's debt challenges. Without
external support, the government's policy levers to arrest a worsening
macroeconomic backdrop and heavier debt burden are extremely limited; the
government's small revenue base, largely and increasingly absorbed by interest
payments, further intensifies the policy dilemma between competing objectives,
including servicing debt while meeting essential social needs. As a result, the
risk of an eventual default has increased.
The initiation of the review for downgrade is prompted by the ongoing
negotiations between the government and the IMF over a funding programme that
may include a condition for debt restructuring to ensure debt sustainability.
Such a restructuring would likely be considered a distressed exchange and
thereby a default under the rating agency's definition. The review will
evaluate the likelihood of a debt restructuring being a prerequisite to secure
sufficient and durable financing from official sources to avert a fiscal and
balance of payments crisis that is already unfolding.
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 Caa1 from B3, reflecting a blended expected loss
consistent with a one-notch uplift on the issuer rating. The rating has also
been placed on review for downgrade given the review initiated on all unsecured
debt ratings of the government.
Finally, Moody's has lowered Ghana's local currency (LC) and foreign currency
(FC) country ceilings to respectively B2 and B3, from B1 and B2.
Non-diversifiable risks are captured in a LC ceiling three notches above the
sovereign rating, taking into account relatively predictable institutions and
government actions, limited domestic political risk, and low geopolitical risk;
balanced against a large government footprint in the economy and the financial
system and external imbalances. The FC country ceiling one notch below the LC
country ceiling reflects constraints on capital account openness and fiscal
policy effectiveness against robust foreign exchange reserves buffers and
average monetary policy effectiveness.
RATINGS RATIONALE
RATIONALE FOR THE RATING
DOWNGRADE TO Caa2
ARRESTING MACROECONOMIC
DETERIORATION PROVES INCREASINGLY DIFFICULT, AGGRAVATING DEBT CHALLENGES
Global and domestic rate hikes result in higher interest rates for the
government while the loss in purchasing power induced by high inflation is a
drag on economic activity. Higher government borrowing costs have rapidly
increased its interest spending, which consumed almost half of the government's
revenue in 2021, a proportion Moody's forecasts to rise to 58% in 2022, one of
the highest globally. Further monetary policy tightening is likely, with
negative effects on already extremely weak debt affordability. The Bank of
Ghana recently reported that the inflation rate climbed to 34% at end of August
2022 despite previous monetary tightening; the highest reading in Ghana since
July 2001.
In the meantime, the local currency, the cedi, has depreciated by around 40%
against the US dollar since the start of the year, exacerbating the challenges
from an already high debt burden. Because foreign currency-denominated debt
accounted for 37% of GDP at end of 2021, Moody's forecasts that the currency
depreciation over 2022 will be the main contributor to the rise in the
debt-to-GDP ratio this year to more than 100% of GDP (104%, 26 percentage
points higher than in 2021).
Meanwhile, Ghana's balance of payments position is deteriorating. Significant
outflows in the first half of 2022 led to a fall in foreign exchange reserves
to $5.9 billion as of the end of the second quarter of 2022 (covering 4.5
months of imports as of first quarter of 2022, which is the latest data
available), down from $8.4 billion at the beginning of the year.
The deteriorating macroeconomic conditions, in particular the deep inflation
shock, have further complicated the policy trade-off for Ghana's authorities:
limiting government primary spending to prioritise paying interest to creditors
is difficult to reconcile with economic and social development objectives,
fueling risks of further social discontent and damaging Ghana's economic and
social outcomes in the medium term.
LIMITED FISCAL POLICY LEVERS
AVAILABLE TO ADDRESS INTENSIFYING DEBT SUSTAINABILITY CHALLENGES
Against the backdrop of higher inflation and larger interest payments, the
government is left with very limited fiscal policy levers to reverse the
deteriorating trend in debt burden and affordability and restore liquidity and
external stability. Moody's expects the government not to achieve the
reductions in fiscal deficits targeted in its 2022 budget and instead to run
stable deficits.
Notwithstanding the government's intention at the start of the year to broaden
its tax base, its capacity to raise its revenue intake (16% of GDP in 2021) is
constrained by the weak macroeconomic environment. Meanwhile, Ghana's room for
manoeuvre on the spending side is also limited. The interest bill, over which
the government has little control in the short- to medium-term, constrains
budget flexibility, especially amid large gross borrowing requirements (around
30% of GDP in 2022) and likely no access to international capital markets nor
sizeable support from the donor community. Moreover, there is a limit to the
extent to which the government can lower primary spending: while the government
had announced large cuts in its main primary spending items earlier this year
implying a reduction of 4% year-on-year in total primary spending, budget execution
over the first half of 2022 shows that spending rose by 26% instead, reflecting
strong spending pressure amid severe economic and inflation shocks.
RATIONALE FOR THE REVIEW FOR
DOWNGRADE
The review for downgrade reflects the risk that some form of debt restructuring
may be required as part of an IMF funding programme currently under negotiation
between the government and the IMF.
The review period will allow Moody's to assess the risks of a restructuring
involving private sector creditors both in the near and more medium term. The
rating agency will focus on the government's strategy to improve the
macroeconomic backdrop and reverse the current negative feedback loop between
high and rising inflation and interest and foreign exchange rates that are
exacerbating the government debt burden and interest bill. The debt
sustainability analysis conducted as part of the IMF programme formulation and
the government's 2023 budget, among other policy decisions, will be important
milestones.
ENVIRONMENTAL, SOCIAL,
GOVERNANCE CONSIDERATIONS
Ghana's ESG Credit Impact Score is highly negative (CIS-4), reflecting its high
exposure to social risks. Resilience to environmental and social risks is weak,
constrained by low wealth and high debt levels.
Ghana's credit profile is moderately exposed to environmental risks (E-3 issuer
profile score). The cocoa sector is a large contributor to GDP, exports and
employment and being demanding in water, it exposes the country to climate
changes and especially droughts. More generally, the size of the agricultural
sector exposes the economy to weather-related disruptions and the effects of
climate change. Ghana is also exposed to water management risks stemming from a
lack of access to potable water in some areas.
The exposure to social risk is highly negative (S-4 issuer profile score),
driven by limited access to quality housing and education, especially in rural
areas. Risks related to health and safety and access to basic services are
moderately negative. While the government has put in place measures aimed at
reducing poverty and inequality and strengthening social safety nets, its
fiscal challenges constrain its scope for meaningful reduction in social risks
given more than half of government revenue is consumed by interest payments.
Governance is highly negative with a G-4 issuer profile score. Overall, Ghana's
institutions have shown some effectiveness, however domestic revenue
mobilisation challenges and significant constraints on fiscal policy
effectiveness manifest in very weak debt affordability. The authorities have
undertaken some institutional reforms on the revenue and competitiveness front,
which will invariably take time to produce results.
Source: Peacefmonline.com