The recent downgrade of the Treasury’s long-term issuer by Moody’s Ratings – from a Caa2 to Ca with a stable outlook – should not be cause for immediate alarm, as market observers had anticipated the development and factored it into their decision-making, Economist and Research Lead at GCB Capital, Courage Boti, has suggested.
He further stated that concerns about the debt restructuring and potential loses to private creditors have been assuaged, in part, by the knowledge that the restructuring would be conducted under the supervision of the International Monetary Fund (IMF).
Responding to a series of questions at a webinar dubbed ‘2023 Budget: The GCB Capital Take’, Mr. Boti said these were reasons why the market did not experience a frenzy after the measures contained in the budget were made public.
“The market has been anticipating the announcement of a debt restructuring programme for a while and the debt exchange announcement is the surest confirmation that there will be a restructuring,” he said.
Whilst details of the format are not readily available, he added: “The only positive is that it is going to be in an orderly way under the IMF. That is, it is going to be programme-motivated rather than an arbitrary restructuring that could be haphazard or an outright default.”
“The market has already been trading at distressed levels. All of the things contained in Moody’s commentary are not new and they have been factored into the pricing of the securities with some trading at 50 percent of their face value or even less, but it has been expected,” he added.
The economist further stated that, barring a delay in closing an agreement with the Fund, he does not anticipate any sharp developments in the ratings, bond prices and the currency market in the very near-term.
The move by the rating agency, which pushes the nation’s bonds just a notch above default and further into junk territory, comes barely five days after the presentation of the 2023 Budget Statement and Economic Policy, where it was announced that the government will seek to implement a debt exchange programme to bring debt to sustainable levels.
In its rationale for the downgrade, Moody’s said it anticipates “substantial losses” to private lenders on foreign and local-denominated debt if the government is to attain a significant level of debt sustainability.
“The Ca rating reflects Moody’s expectation that private creditors will likely incur substantial losses in the restructuring of both local and foreign currencies debts planned by the government as part of its 2023 budget proposed to Parliament on 24 November 2022,” it noted, adding that it took into consideration the volume, structure and cost of the existing public debt stock.
Provisional debt data as of end-September 2022, contained in the Budget statement, show that total gross public debt stood at GH¢467.37billion, approximately 75.9 percent of Gross Domestic Product (GDP).
A breakdown of the figure indicates that the domestic debt component is GH¢195.66 billion, which is 31.79 percent of GDP; in large part due to a sharp rise in interest costs. External debt, on the other hand, stood at GH¢271.71billion, representing 44.15 percent of GDP.
As a share of total public debt, domestic debt reduced from 51.6 percent in 2021 to 41.9 percent as of the end of September 2022, whilst external debt as a percentage of total debt stock stood at 58.1 percent during the period under consideration.
The sharp growth in external debt stock, was, for the most part, driven by depreciation of the local currency, adding GH¢93.86billion to the debt stock.
Overall, debt accumulation increased from 20.7 percent in 2021 to 32.7 percent as at end-September 2022, reflecting the impact of Ghana cedi depreciation on the external debt side
“The stable outlook balances Moody’s assumption that the debt restructuring will happen in coordination with creditors and under the umbrella of a funding program with the IMF against the potential for a less orderly form of default that could result in higher losses for private-sector creditors,” Moody’s noted.