- Compares fiscal situation to HIPC economies
Credit ratings firm, Moody’s Investor Services, has stressed that the new Nana Addo Akufo-Addo administration will continue to face major challenges that could curtail the country’s creditworthiness, including low growth after the coronavirus shock, weak government revenues, low oil prices, and energy sector contingent liability risks.
Speaking after the Electoral Commission declared President Akufo-Addo as the winner of the 2020 elections, Kelvin Dalrymple, a vice president and sovereign analyst at Moody’s said: “On 9 December 2020, the Ghana Electoral Commission declared that incumbent President Nana Addo Akufo-Addo was elected to a second term.
‘’The returning administration will continue to face key challenges constraining Ghana’s creditworthiness, including low growth after the coronavirus shock, weak government revenues, low oil prices, and energy sector contingent liability risks. Moreover, a weakened mandate resulting from a diminished parliamentary majority will further complicate fiscal and economic reform prospects.”
Moody’s in September downgraded the economy’s outlook to B3 Negative over the mounting debt situation, further stating that the deplorable fiscal situation compares to that of a Highly Indebted Poor Country’s (HIPC) economy.
In the Credit Opinion, the global rating firm said the country’s credit profile reflects a high debt burden and weak debt affordability challenges, a track record of revenue underperformance relative to targets, and elevated exposure to international capital flow reversals, a situation, it adds, has been exacerbated by the coronavirus outbreak.
The country’s debt to GDP, as reported by the Central Bank, has now crossed unsustainable levels by hitting more than 71 percent in September 2020. It is even expected to hit 77 percent by end of the year, according to an IMF projection.
Interest expenditures on the debt, the Moody’s report says, are set to rise to 6.8 percent of GDP, up from 5.4 percent of GDP in the budget, thereby, consuming close to 50 percent of total revenue. It is against this background that the rating agency compares the country to a HIPC economy.
“We assess Ghana’s final fiscal strength score at ‘caa3’, below the scorecard-indicated outcome of ‘caa1’. This adjustment mostly reflects weak debt affordability, one of the weakest among the countries that we rate, with interest-to-revenue close to 50 percent in 2020, that is usually discounted for HIPC/IDA countries under our methodology. The adjustment also captures risks associated with contingent liabilities that will continue to weigh on fiscal strength,” the Moody’s report said.
Moody’s further warns that a further weakening in debt affordability amid persisting refinancing risks would indicate a fundamental deterioration in government’s debt-service capacity, resulting in another downgrade at the next rating.
Another area of concern expressed by Moody’s is government’s reliance on the central bank to finance the budget, a practice that came to a halt after the country entered an IMF External Credit Facility (ECF) some few years ago.
“We also expect the government’s reliance on the central bank to finance these deficits will further weaken the country’s external position. The government’s increased reliance on central bank financing for fiscal and quasi-fiscal activities risks undermining the efforts made by the authorities in building a sound macroeconomic framework during the previous IMF programme, which helped to usher in significant portfolio inflows.
A prolonged increase of the monetary base to finance the government deficit as well as other quasi-fiscal activities would weaken the sustainability of the country’s external position and impair the ability of the sovereign to finance its rising debt burden,” states the report.
However, the report added that the rating can be upgraded if financing pressures reduce, either from increasing evidence that the government is able to limit the increase in funding needs or confidence it will be able to secure sufficient funding at moderate costs.
“Over the medium term, a stabilization and reduction in the debt-service ratio would ease refinancing risks and support an improvement in debt-affordability metrics. The implementation of measures that would arrest the rise in the direct and contingent debt burden and give confidence that the burden would fall will also support a return of the outlook to stable. Ultimately, as the current pressures dissipate, the positive drivers of the rating identified in the action in January could be expected to reemerge,” the report said.