Moody’s Downgrades Ghana over Heavier Debt Burden, Weak Revenue

Moody’s Downgrades Ghana over Heavier Debt Burden, Weak Revenue

Moody’s Investors Service has 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. The recent downgrade comes after Fitch lowered Accra ratings to CC from CCC.

According to Moody’s, 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, the rating note stated. Combined, a sharp rise in interest rates, high inflation and a rapidly weakening currency exacerbate the government’s debt challenges, it added.

“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, large and increasingly absorbed by interest payments, further intensifies the policy dilemma between competing objectives, including servicing debt while meeting essential social needs”.

The global rating firm said, as a result, the risk of an eventual default has increased. 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.

“Such a restructuring would likely be considered a distressed exchange and thereby a default under the rating agency’s definition”, the rating note stated.

Moody’s stated in the note that 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.

It said 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.

It added that 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.

RATING RATIONALE

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.

According to the rating note, 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 of 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 the 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

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, the rating note reads.

Moody’s expects the government not to achieve the reductions in fiscal deficits targeted in its 2022 budget and instead to run stable deficits; saying 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, Moody’s said; noting that while the government had announced large cuts in its main primary spending items earlier this year. READ: Nigerian Economy Scores ‘Highs’ and ‘Lows’ in Fresh Rating

This implies 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. # Moody’s Downgrades Ghana, Cites Heavy Debt Burden, Weak Revenue