Credit Rating: Does Ghana need 3 credit rating agencies at this time?
Credit rating agencies Fitch and Moody’s downgraded Ghana’s credit rating but S&P Global which has Ghana’s rating already at ‘B-‘, affirmed the country with a stable outlook. This is surprising, right? Yes, it is the situation.
All this comes at a time when the country is challenged in raising revenues to meet its expenditure. It is one of the reasons why the controversial E – Levy has become critical for the government and they seem desperate for its passage. But NorvanReports is of the view that one of the reasons for the E – Levy is that the Nana Addo Dankwa Akufo-Addo government does not want to go to the International Monetary Fund for any programme of any sort.
But with the downgrade of Moody’s, there is going to be a reaction on the bond market, where foreign investors are going to pull out which will cause inflation, high-interest rates will be triggered and the Cedi performance will be affected as well.
But to the substantive matter of whether or not it is important for us to keep three rating agencies at this time, the decision will be yours.
Many countries around the world, have only two (2) rating agencies but Ghana keeps three (3).
We pay as much as four hundred thousand United States dollars ($400,000) for the rating agencies’ work they do for us by rating. I guess you are shocked but that is the reality.
Considering our current economic challenges and the fact that even more advanced countries keep only two (2), will it be prudent to say it’s time to consider dropping one of the three (3) rating agencies? As to which one should be dropped, you reading this article can help the government make that decision.
Ghana has received bad credit rating actions from the three topmost credit rating agencies in the world.
Ghana was first downgraded by Fitch Ratings on January 14, 2022, when the country’s Long-Term Foreign Currency Issuer Default Rating (IDR) was lowered from ‘B’ to ‘B-‘ with a negative outlook.
Fitch per its rating action communicated the uncertainty of government’s ability to stabilize its debt against a backdrop of tightening global financing conditions as well as the country’s sovereign loss of access to the international capital markets.
Fitch’s rating action was recently followed by that of Moody’s Investor Services and S&P Global Ratings – both on February 4, 2022.
Moody’s in its rating action, downgraded the country’s Long-Term Issuer and Senior Unsecured Debt to Caa1 from B3.
Moody’s rating action implied that the country’s debt obligations to investors is of poor standing and subject to very high credit risk.
According to Moody’s, the downgrade to Caa1 reflects Ghana’s increasingly difficult task which the government faces in addressing its intertwined liquidity and debt challenges.
S&P Global in its rating action, also downgraded Ghana asserting the country remains constrained by weak public finances although recent commitments has been made by the government to impose a 20% cut to discretionary spending or expenditure.
The downgrading by the three topmost credit rating agencies really tells the story of how dire the country’s debt stock, high fiscal deficits and low revenue generation challenges are to Ghana’s economic growth and development.
It is an indication to government on the need to undertake strong fiscal consolidation to significantly drive down the country’s debt stock while simultaneously driving up in significant volume, the country’s revenues to pay off outstanding debts and undertake development-enhancing programmes.
Read below the credit ratings of the three agencies.
Moody’s rationale for downgrading Ghana’s Long-Term Issuer Debt
RATINGS RATIONALE
RATIONALE FOR THE RATING DOWNGRADE TO Caa1
DEBT AFFORDABILITY WORSENS, GOVERNMENT DEBT STILL ON AN UPWARD TREND
Moody’s projects that Ghana’s government debt ratios will continue to deteriorate in the next few years with extremely weak debt affordability significantly constraining policymaking.
Moody’s estimates that government debt ended 2021 at 80% of GDP while interest payments alone consumed half of government revenue that year (positioning Ghana with the second largest ratio among Moody’s rated sovereigns). Given Ghana’s still low average income at about $6000 per capita at Purchasing Power Parity and demands on social spending, very weak debt affordability constrains the government’s scope of policy action, intensifying the policy trade-off between servicing debt and delivering services to the Ghanaian population.
Moody’s projects that the government will improve its primary balance by a cumulative 3% of GDP over 2022- 24. The government’s own fiscal consolidation plan presented in November 2021 sets more ambitious targets, supported by new revenue measures worth 3% of GDP, some of which have since been opposed in Parliament. The government has announced a 20% cut in primary spending, equivalent to a 4% cut on a year on-year basis or 16% in real terms, to compensate for any shortcoming in the government’s revenue measures
package. Such an unprecedented fiscal tightening will be socially, economically, and politically challenging to implement.
Moreover, Moody’s factors in further fiscal pressure from interest payments in the short term as the deterioration in funding conditions recently observed is unlikely to reverse until the government demonstrates to investors that significant fiscal consolidation is underway. Both domestic and external factors underpin Moody’s assumption that debt costs will remain high, including high inflation (at 12.6% most recently) and Moody’s expectation of tighter monetary policy globally. Ghana’s borrowing needs remaining elevated, at around 30% of GDP annually, mean higher borrowing rates will quickly translate into higher interest costs. Ultimately, Moody’s expects that a higher interest bill in 2022 and 2023 will offset the improvement in the government’s primary balance, thereby maintaining double-digit fiscal deficits (in cash terms) with a concomitant increase in the government’s debt burden.
WEAKER GOVERNMENT LIQUIDITY POSITION; EXTERNAL PRESSURES TO MOUNT THE LONGER FINANCING OPTIONS REMAIN CONSTRAINED
The government of Ghana’s capacity to access sufficient funding sources at manageable costs to meet large funding needs has deteriorated. The government’s external funding options have narrowed and, for the time being, appear limited to official sector sources or financing secured with the support of the official sector. This implies a greater reliance on domestic borrowing, primarily sourced from the banking sector at a cost that has
recently increased to high levels. Ghana’s fiscal reserves, including in the various petroleum funds remain very small and therefore not suited to provide funding in times of stress.
Ghana’s constraints on external funding come at a time when external debt service requirements in foreign currency are contained, thereby limiting short-term government liquidity risks. Foreign exchange reserves at $9.3 billion as of October 2021 according to the IMF (equivalent to 8 months of imports) provide a buffer to meet external debt flows. However, over the medium term, the government’s external liquidity profile will likely erode unless Ghana is able to restore its access to a wider range of external borrowing sources, including international markets. This, in turn, will rely on the ability of the government to demonstrate a track record of delivering on its fiscal consolidation objectives.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances Ghana’s significant fiscal challenges, large financing needs and funding constraints against the government’s pre-pandemic track record of relatively effective policies and maintenance of a variety of funding sources.
On the downside, the constraints to policymaking posed by interest payments absorbing such a large proportion of the budget, risk undermining growth and, over time, social stability. However, while the capacity of the government to reduce its borrowing needs is limited, in 2022-23 refinancing will be primarily for local currency debt, providing a time-window for the government to deliver on its fiscal consolidation strategy and engender confidence that may restore its access to a broader range of external funding sources.
Meanwhile, Ghana’s institutional framework and dynamic economy remain key credit supports. The government built a track record of meeting fiscal targets in the years preceding the pandemic-related shock in 2020, managing to consolidate its primary balance by 4.5% of GDP between 2016 and 2019. Improvements to Ghana’s personal and property tax systems and customs will likely continue and help the government in its efforts to improve tax compliance. Finally, the country’s strong growth potential from multiple sources both in the oil and non-oil sectors underpins Moody’s expectation for growth in the range of 4.5-6% over the medium term.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Ghana’s ESG Credit Impact Score is highly negative (CIS-4), reflecting its high exposure to social risks. Resilience to environmental and social risks is weak, constrained by low wealth and high debt levels.
Ghana’s credit profile is moderately exposed to environmental risks (E-3 issuer profile score). The cocoa sector is a large contributor to GDP, exports and employment and being demanding in water, it exposes the country to climate changes and especially droughts. 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.
The exposure to social risk is high (S-4 issuer profile score), driven by limited access to quality housing and
education, especially in rural areas. Risks related to health and safety and access to basic services are moderately negative. While the government has put in place measures aimed at reducing poverty and inequality and strengthening social safety nets, its fiscal challenges constrain its scope for meaningful reduction in social risks given more than half of government revenue is consumed by interest payments.
Governance is highly negative with a G-4 issuer profile score. Overall, Ghana’s institutions have shown some effectiveness. Moody’s has lowered the governance issuer profile score to reflect domestic revenue mobilisation challenges and significant constraints on fiscal policy effectiveness reflected by very weak debt affordability. The authorities have undertaken some institutional reforms on the revenue and competitiveness front, which will take some time to produce results.
GDP per capita (PPP basis, US$): 5,799 (2020 Actual) (also known as Per Capita Income) Real GDP growth (% change): 0.4% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 10.5% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -10.8% (2020 Actual) (also known as Fiscal Balance) Current Account Balance/GDP: -3.1% (2020 Actual) (also known as External Balance) External debt/GDP: 45.7 (2020 Actual)
Economic resiliency: ba3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 01 February 2022, a rating committee was called to discuss the rating of the Ghana, Government of. The main points raised during the discussion were: The issuer’s institutions and governance strength, have decreased. The issuer’s fiscal or financial strength, including its debt profile, has decreased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody’s could downgrade Ghana’s ratings if it expected that the government will face heightened difficulty in covering its funding needs, increasing the likelihood of default. This could be evident in a sharper increase in interest rates than currently expected by Moody’s and could result from underperforming fiscal results. Moreover, there would be downward pressure on the ratings should Ghana’s currency, the cedi, weaken significantly with limited scope for a reversal.
Conversely, Moody’s would likely upgrade Ghana’s ratings if fiscal consolidation proceeded more rapidly, resulting in much more favourable funding conditions for the government and indicating stronger policy credibility. Evidence that government’s funding options have broadened sustainably would also provide a path back to a higher rating level.
Read details of Fitch’s downgrading of Ghana’s IDR
KEY RATING DRIVERS
The downgrade of Ghana’s IDRs and Negative Outlook reflect the sovereign’s loss of access to international capital markets in 2H21, following a pandemic-related surge in government debt. This comes in the context of uncertainty about the government’s ability to stabilise debt and against a backdrop of tightening global financing conditions. In our view, Ghana’s ability to deliver on planned fiscal consolidation efforts could be hindered by the heavier reliance on domestic debt issuance with higher interest costs, in the context of an already exceptionally high interest expenditure to revenue ratio.
Ghana’s effective loss of market access to international bond markets increases risks to its ability to meet medium-term financing needs. In our view, Ghana has sufficient liquidity and other available external financing options to cover near-term debt servicing without Eurobond issuance. However, there is a risk that non-resident investors in the local bond market could sell their holdings, particularly if confidence in the government’s fiscal consolidation strategy further weakens, placing downward pressure on its reserves.
Fitch assumes that Ghana will be unable to issue on international capital markets in 2022 and prospects for doing so in 2023 are uncertain. Ghana’s international reserve position has become highly reliant on annual Eurobond issuance. Moreover, as of July 2021, non-resident investors held just below 20% (USD5.8 billion) of Ghana’s outstanding domestic government debt. While the maturity of these holdings is long-term, an outflow would put additional downward pressure on Ghana’s reserves.
We forecast that Ghana will face approximately USD2.7 billion (3.3% of GDP) in sovereign external interest service and amortisation payments in 2022. We believe that the government can meet its external debt servicing without market access given its reserves, which we estimate at USD7.9 billion at end-2021 (3.2 months of current external payments). Reserves were bolstered by USD3 billion in Eurobonds in 2Q21, which helped the government to meet its approximately USD3.5 billion (4.7% of GDP) in sovereign external debt servicing costs last year, and by the USD1 billion IMF SDR allocations.
Fitch forecasts the general government fiscal cash deficit to narrow to 9.1% of GDP in 2022 from 15.1% in 2020 and 12.5% in 2021 (including 3% of GDP in domestic arrears clearance and payments related to the state-owned energy sector). The 2022 deficit would still be more than twice the 2022 ‘B’ median of 4.6% and risk to public finances remain high. The government envisages a deficit (including financial and energy sector support) of 7.4% in 2022 and 5.5% in 2023, with a fall to below the legal deficit ceiling of 5% in 2024.
The government’s fiscal consolidation plans are focused on revenue measures adopted in the 2022 budget, including a new 1.75% e-levy on certain digital transactions and changes to the calculation of certain taxes and import duties. The medium-term fiscal framework envisages that these new revenue measures, together with fading pandemic-related expenditure, will drive an increase in government revenue to 20.0% of GDP in 2022 from an estimated 15.4% in 2021.
Fitch believes that Ghana will achieve moderate medium-term fiscal consolidation, but that the government’s forecasts are overly optimistic. We forecast the fiscal deficit will narrow by significantly less, to 9.5% of GDP in 2022 and approximately 8.0% in 2023, as government revenue experiences a smaller increase. Ghana has struggled with earlier efforts to raise revenue/GDP and public finances were deteriorating even before the pandemic, albeit partly related to the clean-up in the financial and energy sector.
General government debt reached an estimated 83% of GDP at end-2021, including approximately 2% of GDP in debt held through the Energy Sector Levy Act special purpose vehicle. We forecast government debt to remain on an upward path through 2025, but expect debt to grow at a slower pace as the primary deficit narrows in 2022 and 2023. Debt affordability metrics will remain weak. Ghana’s debt constitutes 539% of government revenue, compared with the ‘B’ median of 325%. Interest payments were 44.6% of revenue in 2020 and the ratio is likely to continue rising through 2023, assuming a rising share of domestic debt in total debt in the absence of external financing options.
Given the slow pace of private sector credit growth and the weak asset quality environment, we expect that the domestic lenders will be able to meet the government’s increased reliance on domestic debt issuance. In 2020, the government placed GHS10 billion (2.7% of GDP) with the Bank of Ghana as an emergency measure. This measure could be repeated in response to additional shocks, but would carry risks to macroeconomic stability.
Ghana’s IDRs also reflect the following key rating drivers:
Fitch estimates that Ghana’s GDP growth accelerated to 4.7% in 2021 from 0.4% in 2020. We forecast growth to increase further to 5.5% in 2022, as the industrial sectors, including oil, recover in line with global growth recovery. Ghana experienced three years of strong growth prior to 2020, largely driven by increasing oil production. We expect oil production to increase to 190 thousand barrels per day (kbpd) in 2022, from an estimated 160 kbpd in 2021, but to remain flat through 2023, which will limit Ghana’s medium-term growth potential.
We expect post-pandemic growth recovery to keep GDP growth potential around 5%. The number of Covid-19 cases has increased dramatically in January, due to the Omicron wave, but hospitalisations and deaths remain below previous waves. Omicron is not likely to significantly impact 2022 growth. However, only 20% of Ghanaians have at least one vaccine dose. The low level of vaccination means that Covid-19 will continue to present risks to Ghana’s medium-term growth.
We forecast average annual inflation to decelerate slightly to 9.0% in 2022 after averaging 9.8% in 2021. Global supply chain issues fed through to domestic inflation, as did higher energy prices. The Bank of Ghana raised its main policy rate by 100bp to 14.5% in November 2021, reversing the 100bp cut that came in May. We envisage additional rate hikes in 2022, which could further exacerbate the government’s domestic debt interest costs.
Ghana’s external position will continue to be supported by a structural shift in the current account balance. We estimate that the current account deficit widened to 3.4% of GDP in 2021, from 3.2% in 2020, as imports recovered and exports remained flat on a nominal basis. An increase in gold and oil exports will help the current account deficit to narrow to 3.1% in 2022. Ghana’s current account deficit averaged 7% of GDP in the 10 years prior to 2017, when oil production reached significant levels. Fitch also expects that the overall external balance will improve as FDI increases in 2022 and 2023. Higher FDI flows and lower fiscal financing needs will help reduce Ghana’s overall external indebtedness. Fitch forecasts net external debt to fall to 25% of GDP in 2022 and further in 2021. The cedi remained broadly stable throughout 2020 and 2021.
ESG – Governance: Ghana has an ESG Relevance Score of ‘5[+]’ for both Political Stability and Rights and Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Ghana has a medium WBGI ranking at the 53rd percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– External Finances: A decline in international reserves sufficient to lead to increased financing stress that could arise as a result of a prolonged lack of access to international capital markets or from an outflow of non-resident investors from the domestic debt market.
– Public Finances: Further deterioration in fiscal liquidity conditions or signs of difficulty in meeting debt servicing costs, for example from a failure to source new external financing or from increased pressure on domestic debt markets.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– External Finances: A sustained resumption of the sovereign’s access to international capital markets, or a sustained improvement in Ghana’s external liquidity, such as an increase in international reserves occurring through non-debt-creating flows.
– Public Finances: Greater confidence in the government’s ability to source external financing, and/or place onto a downward path, public debt/GDP, for example, through the sustained implementation of a credible post-pandemic fiscal consolidation strategy.
Read details of S&P rating action below
ResearchUpdate Ghana Feb042… by Fuaad Dodoo