“Ghana’s Debt Burden to Remain Above 80% of GDP for Foreseeable Future”

“Ghana’s Debt Burden to Remain Above 80% of GDP for Foreseeable Future”

Ghana’s Debt burden to remain above 80% of the nation’s gross domestic product (GDP) for foreseeable future, says Moody’s in a new report on the sovereign. The Investors Service has affirmed the B3 long-term issuer ratings of the Government of Ghana, saying the country’s outlook remains negative as high debt burden and continuous borrowing put the country on a tight path.

“The B3 rating and negative outlook reflect Ghana’s high debt burden that is unlikely to fall rapidly, continued weak debt affordability, high gross borrowing requirements and ongoing liquidity challenges in the face of downside economic, social and financial risks in the aftermath of the coronavirus pandemic”, Moody’s said in the report.

It added that the rating affirmation also takes into account improving growth prospects, resilient external sector performance and Ghana’s continued access to domestic and international capital markets, supported by the government’s structural economic reform agenda to improve export competitiveness and broaden the revenue base.

Ghana’s local currency (LC) country ceiling remains unchanged at Ba3 and the foreign currency (FC) country ceiling unchanged at B1.

The report explains that Moody’s assessment is that non-diversifiable risks are appropriately captured in a local currency ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and government actions.

This also includes low domestic political, and geopolitical risk; balanced against a large government footprint in the economy and the financial system, external imbalances, and reliance on revenue from commodities that can lead to country-wide stress.

It said the foreign currency country ceiling is maintained one notch below the local currency country ceiling, reflecting existing constraints on capital account openness, balanced against moderate fiscal and monetary policy effectiveness.

Explaining its position on the country, Moody’s said Ghana’s credit profile is characterized by large gross borrowing requirements that exceed 20% of GDP.

As well, it noted the country’s persistent weak debt affordability stemming from interest payments rising to over 40% of revenue—both of which are among the weakest of sovereigns rated by Moody’s, underpinning its exposure to potential funding shocks.

According to the ratings, both long-standing credit characteristics are the result of a high debt burden financed at relatively high costs and relatively short maturities.

It recognised that these vulnerabilities have been exacerbated by the pandemic.

Ghana’s fiscal deficit widened to 13.9% of GDP in 2020 -inclusive of costs associated with the financial sector clean-up and “take or pay” energy contracts-, pushing the debt burden beyond 80% of GDP, from 62.6% in 2019.

“While the government’s most recent budget sets out a plan of fiscal consolidation to reduce the fiscal deficit to 4.8% of GDP by 2024, the longer-term economic and social scarring from the coronavirus shock presents significant challenges to achieving such ambitious targets”.

Moody’s assumes that the pace of consolidation will be slower, leaving the debt burden above 80% of GDP for the foreseeable future.

“In the meantime, Ghana will increasingly rely on domestic and international bond issuance to meet deficit financing requirements and Eurobond maturities starting 2023 and rising to $1 billion per year 2025-2027, leaving the sovereign exposed to a potential unfavourable turn in investor confidence”, the ratings added.

Meanwhile, the report said the country’s robust growth recovery and stable external position support its creditworthiness rating.

Downside risks notwithstanding, Moody’s said Ghana’s credit profile benefits from strong economic growth potential, expects GDP growth to rise towards 6% in 2022 and stay around these rates in the medium term — in the absence of new shocks.

Meanwhile, Ghana’s external position which has been a credit weakness in the past has remained relatively stable through the pandemic, denoting greater resilience, it added.

The report noted that the current account deficit was stable last year, at 2.6% of GDP; assuming steady commodity prices, Moody’s expects the deficit to remain relatively narrow around 3% of GDP.

Foreign exchange reserves, at four months of imports cover, have been bolstered by the recent Eurobond issuance and gold and cocoa production that continues to perform well. Coupled with the ramping up of oil and gas production from the Pecan field, export prospects remain favourable.

It said Ghana also has a track record of political stability and relatively sound institutional and governance frameworks compared to peers, most recently demonstrated in the peaceful elections in late 2020 and continued implementation of the economic reform agenda to improve export competitiveness and broaden the revenue base.

The cocoa sector is a large contributor to GDP and to exports and remains an important source of employment.

Ghana is exposed to water management risks stemming from a lack of access to potable water in some areas. The weight of the agricultural sector exposes the economy to weather-related disruptions and the effects of climate change.

Read Also: Ghana’s External Deficits Account Estimated to 4.4% of GDP

In general, the government’s measures aimed at reducing poverty and inequality and continuing to strengthen social safety nets somewhat mitigate but do not fully offset social risks.

“Ghana’s Debt Burden to Remain Above 80% of GDP for Foreseeable Future”