Fitch Downgrades Ghana on High Risk of Debt Distress
With limited external reserves buffer amidst expectation that Accra will pursue debt restructuring, Fitch Ratings said it has downgraded Ghana’s Long-Term Local- and Foreign-Currency Issuer Default Ratings to ‘CC’, from ‘CCC’ amidst depreciating local currency.
According to the rating note, it said the downgrade reflects the increased likelihood that Ghana will pursue a debt restructuring given mounting financing stress, with surging interest costs on domestic debt and a prolonged lack of access to Eurobond markets.
“There is a high likelihood that the International Monetary Fund, 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 gross domestic product”, Fitch said.
According to the rating note, Fitch analysts believe this will be in the form of a debt exchange and will qualify as a distressed debt exchange under its criteria. Read: Debt Distress Rising in Sub-Saharan Africa, says Fitch
However, it said the government has not confirmed or denied press reports that Ghana is preparing to negotiate a restructuring, saying interest costs on external debt are lower than for domestic debt and near-term external debt amortisations appear manageable.
However, Fitch believes there could be an incentive to spread a debt restructuring burden across domestic and external creditors and therefore its analysts said they do not have a strong basis to differentiate between Foreign- and Local-Currency ratings at this time.
Ghana is suffering from financial constraints and bedridden with high debt costs amidst interest rate hikes by central bankers across the globe which makes Eurobond call an expensive adventure for most African countries seeking to leverage.
Ghana’s interest costs reached 47.5% of revenue in 2021 and 54% in the first half of 2022, according to Fitch Ratings which also noted that Interest payments on domestic debt comprise around 75% of total interest costs.
This reflects high yields on domestic debt, which have climbed following a 34% year-on-year spike in inflation as of August 2022 and monetary tightening, with the Bank of Ghana hiking its policy rate to 22.0%, from 14.5% in February.
Fitch said yields on the 91-day Treasury bill reached 27.0% in August, up from 12.5% in August 2021, and 10-year yields have spiked to above 35% in September, from around 20% in the first quarter of 2022.
“We expect external financing access to stay limited until at least an IMF programme is agreed, as Ghana is likely to remain locked out of Eurobond markets, which had been the country’s regular source of external financing”.
Ghana obtained a USD750 million term loan from African Export-Import Bank this year and USD250 million in syndicated loans from global commercial banks. It can also use its sinking fund.
Fitch said it estimates Ghana faces around USD3 billion of external debt service costs in 2023, including amortisation and interest.
“We expect persistent downward reserve pressure in the absence of an IMF programme. Official reserve assets fell to USD7.3 billion in June, from USD9.8 billion in 2021 and gross international reserves, excluding oil funds and encumbered assets, totalled USD7.1 billion in March, the latest figure available”.
The exchange rate has weakened by 40% year-to-date against the US dollar, reaching GHC10:USD1 in September, potentially made worse by the drop in non-resident investment in local-currency debt. Non-resident holdings were GHC23.1 billion at the end of August, translating to 4% of Fitch-forecast 2022 gross domestic product.
The government reversed its long-standing position against seeking IMF support in July 2022 and Fitch analysts said they believe a deal with the IMF is likely within the next six months. Ghana has indicated it could request USD2 billion-3 billion and the programme could unlock budget support from other official lenders.
However, Fitch believes a restructuring will be deemed necessary, with local-currency debt treatment potentially included prior to IMF approval, as the IMF is unable to provide financing where it assesses a country’s debt to be unsustainable.
The most recent IMF debt sustainability analysis, conducted in 2021, found Ghana at a high risk of debt distress and vulnerable to shock to market access and high debt servicing costs. Interest costs have risen substantially since then.
“We expect high-interest costs and low revenue to impede fiscal consolidation”, Fitch said.
Ghana’s medium-term fiscal framework in the 2022 budget envisaged narrowing the deficit to below the 5% of GDP ceiling by 2024, based on the expiry of pandemic-related expenditure and higher domestic revenue, driven by new taxes, including an electronic transaction levy.
However, implementation delays led to lower revenue and a larger nominal deficit in the first half of 2022 relative to budget forecasts. The government’s slim majority in parliament could frustrate attempts to raise tax rates or implement new taxes.
“We affirmed the rating on Ghana’s partially guaranteed note backed by the World Bank’s International Development Association as the note may be excluded from a debt restructuring even if other Eurobonds are included”, Fitch said.
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