Fitch Ratings has further downgraded Ghana’s long-term foreign-currency (LTFC) issuer default rating (IDR) to ‘CCC’ from ‘B-‘.
The downgrade comes on the back of increasing possibility of debt restructuring, uncertainty surrounding the pending IMF programme, tight external debt servicing schedule, as well as the uncertain pace of fiscal consolidation and high cost of domestic debt.
Citing the reasons, the rating agency said: “The downgrade reflects the deterioration of Ghana’s public finances which has contributed to a prolonged lack of access to Eurobond markets, in turn leading to a significant decline in external liquidity”.
It further emphasised the threat to the country’s external reserves, in the absence of new external financing sources.
“In the absence of new external financing sources, international reserves will fall close to two months of current external payments (debits in the current account) by end-2022,” Fitch said.
Government has requested support from the International Monetary Fund (IMF) of about US$3billion, which will likely lead to additional financing from the IMF and other multilateral lenders.
However, Fitch raised concerns about the country’s high-interest costs and structurally low revenue as a percentage of GDP – which is less than 20 percent, saying there is a likelihood that IMF support will necessitate some form of debt treatment,
“Although this is not our main scenario, the high-interest burden on local-currency debt also means that the inclusion of a domestic debt treatment cannot be ruled out.”
On the pending IMF programme, Fitch believes that a deal with the IMF is likely within the next six months; however, the timing of such a deal is uncertain and will be dependent on government’s ability to present a credible fiscal reform plan in line with increasing government revenue and improving debt affordability metrics.
The most recent IMF debt sustainability analysis, conducted in 2021, found Ghana at a high risk of debt distress and vulnerable to shocks from market access and high debt servicing costs.
Fitch estimates that Ghana faces US$2.75billion of external debt servicing in 2022 including amortisation and interest, and US$2.8 billion in 2023.
The country is expected to likely remain locked out of Eurobond markets as access to external financing continues to remain tight. The Eurobond markets have come to be a regular source of external financing for this government.
In 2022, it is expected that government will meet its external debt obligations – in part through a combination of a US$750million term loan from the African Export-Import Bank (BBB); US$250million in syndicated loans from international commercial banks; and up to US$200million from government’s sinking fund.
“In the absence of an approved programme by end of the year, government will have to draw more heavily on its international reserves – which were US$7.6m million, including oil funds and encumbered assets, as of June 2022,” Fitch alerted.
On the risk associated with the uncertain pace of fiscal consolidation, Fitch said delays in implementing the new revenue measures have resulted in lower revenue and a larger nominal deficit in 1H22 relative to budget forecasts.
However, it noted that the possibility of new revenue measures could lead to further shrinkage of deficit in 2023; but government’s slim majority in parliament could frustrate attempts to raise tax rates or implement new taxes.
Currently, government interest costs have reached 47.5 percent of revenue for 2021, considerably above the current ‘B’ median of 10.7 percent, according to Fitch.
“We expect interest costs to remain at or above 45 percent through 2024.”
Interest costs largely reflect high yields on domestic debt. Yields have climbed higher in 2022, following inflation spikes and monetary tightening by the Bank of Ghana (BoG).
