S&P Downgrade: Cedi’s troubles intensify amid further sell-offs by foreign investors

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foreign currency credit ratings

The latest downgrade of Ghana’s foreign and local currency credit ratings by Standard and Poor’s (S&P) Global Ratings – from ‘B-/B’ to ‘CCC+/C’ with a negative outlook – could intensify pressure on the local currency through further sell-offs by foreign investors.

The Ghanaian economy remains at high risk, as it stands exposed to foreign portfolio outflows due to the sizeable outstanding holdings of non-residents in domestic bonds which is elevated at GH¢26.8billion, equivalent to US$3.63billion as of June 2022 – thus reducing by 6.6 percent year to date (YTD).

The Ghana cedi struggled to stabilise in the first half of 2022 (1H22) due to inflation uncertainty and limited forex reserves. The country’s loss of access to international funding in 1H22 exposed the cedi to intense depreciation pressure. The cedi further depreciated against the US dollar as the currency pair ended last week’s trading at GH¢8 to the US dollar, indicating a week-on-week slip of 5.10 percent and a YTD loss of 33.20 percent.

According to S&P, the downgrade is due to intensifying financing and external pressures on the economy.

The rating agency highlighted the COVID-19 pandemic’s lingering effects and severe global shock of Russia’s invasion of Ukraine on Ghana and its consequent fiscal and external imbalances, as well as elevated gross financing needs in the face of an international capital market hiatus as reasons for the downgrade.

With a negative outlook, S&P notes the country has limited commercial financing options – notwithstanding the steps taken by government to fast-track fiscal consolidation and the passage of key revenue bills.

Commenting on the latest downgrade in an interview with the B&FT, Senior Analyst with Databank, Courage Kingsley Martey, said this downgrade could intensify pressure on the local currency via the domestic bond market as non-residents continue to cut their exposure to a downgraded country.

“More especially, those offshore investors whose mandate does not allow them to hold bonds in a ‘CCC-rated’ category could join the bandwagon of sellers on the domestic market,” the Senior Analyst said.

He further expressed the view that the recent downgrade was just a matter of time following the example set by Fitch and Moody’s earlier in the year.

“Indeed, S&P has been quite patient with us on their rating action this year. At the time when Fitch and Moody’s opted to downgrade Ghana on the expected deterioration of external balances, S&P waited until the risk of depletion in external buffers has materialised. So, on this count, we believe government should have little argument against S&P for this downgrade,” Mr. Martey said.

From a Eurobond pricing perspective, the market analyst does not foresee a substantial upsurge in yields (or decline in bond prices) directly from this downgrade, because it did not offer new information that is not already reflected in the present market sentiments.

“Our review of Ghana’s Eurobond prices in early Monday trading hours after the weekend downgrade rather showed price gains across the Ghana Eurobond curves by up to 1 percentage point. The price gain reflects more concerns about a potential recession in the US economy, given the inversion of the US yield curve as well as simmering tension between China and the US after Speaker Pelosi’s visit to Taiwan,” the Senior Analyst said.

Accordingly, this signals that the nation’s fundamental challenges have already been fully priced-in.

However, Mr. Martey anticipates that the downgrade could arm-twist government with pressure to consider some form of debt treatment as part of the ongoing negotiations with the International Monetary Fund (IMF) for a programme.

“This would ultimately be bad news for Ghana’s credit story, which would keep future credit spreads higher than preferred in the early days of regaining access to the international capital market.  The S&P downgrade has therefore thrown the spotlight firmly on what happens to Ghana’s debt under the impending IMF programme,” he said.

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