Finance Ministry disappointed in S&P credit rating downgrade
The government, through the Finance Ministry, has expressed disappointment in the credit rating downgrade of the country’s sovereign creditworthiness by Standard and Poor’s (S&P) Global Rating.
According to the government, the rating action ignores the bold policies implemented in 2022 to address the country’s macro fiscal and debt sustainability challenges.
Adding that, government’s current engagement with the IMF for a programme is expected to support its drive to restore and sustain macroeconomic stability, debt sustainability and promote growth and job creation.
“On 5 August 2022, Standard and Poor’s (“S&P”) Global Ratings downgraded Ghana’s foreign and local currency credit ratings from ‘B-/B’ To ‘CCC+/C’ with a negative outlook. According to S&P, the downgrade is due to intensifying financing and external pressures on the economy.”
“The Government is disappointed by S&P’s decision to downgrade Ghana despite the bold policies implemented in 2022 to address macro fiscal challenges and debt sustainability which have been significantly exacerbated by the impact of these global external shocks on the economy.
“Our current engagement with the International Monetary Fund (IMF) for a programme, incorporating our Enhanced Domestic Program (EDP), is expected to support our drive to restore and sustain macroeconomic stability; debt sustainability and promote growth and job creation whilst ensuring social protection to achieve our vision of a Ghana Beyond Aid,” read parts of the statement issued by the Finance Ministry in response to the rating action.
S&P Global Ratings on Friday, August 5, 2022, downgraded Ghana’s sovereign debt to CCC+/C, pushing the country’s debt further into speculative territory.
This is after it affirmed Ghana’s sovereign debt at ‘B-‘ with a stable outlook in February this year.
In its February rating action, S&P noted Ghana remains constrained by weak public finances, although recent commitments by the governing party to impose a 20% cut to discretionary spending will, under its projections, reduce expenditure by over 1% of GDP during 2022.
“This implies a 2.8 percentage point (ppt) narrowing of the headline cash general government deficit to 9.4% of GDP in 2022, including arrears payments of 0.4% of GDP and energy sector transfers of 1% of GDP (versus the government’s projection of 7.9% of GDP for the overall cash deficit),” it said.
It however, added that, stepped up fiscal consolidation and solid growth should put debt to GDP on a downward path.
However, in its August 5 rating action, S&P said its outlook for the country is negative, “reflecting Ghana’s limited commercial financing options, and constrained external and fiscal buffers.”
According to S&P, the Covid-19 pandemic and the conflict in Russia have magnified Ghana’s fiscal and external imbalances.
Demand for foreign currency has been driven higher by several factors, including non-resident outflows from domestic government bond markets, dividend payments to foreign investors and higher costs for refined petroleum products, the agency said.
The nation has also been affected by a lack of access to Eurobond markets, S&P added.
What the rating action means
Per S&P’s definition, the CCC+/C credit rating means that, an obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
The credit rating given to a company or government can impact on its ability to borrow money.
Ratings with a substantial level of risk attached to them, like CCC+, may have less appeal for investors compared to investment-grade ones.
They’re given to entities that may have trouble paying their debts if things take a turn for the worse.
The implications
The recent downgrade by S&P poses further challenges to government’s resolve to re-enter the international capital markets (Eurobond markets).
It further dampens investor confidence in the Ghanaian economy and consequently results in more capital outflows from domestic government bonds by non-resident investors.
It also raises questions over the efficiency of government’s domestic revenue mobilisation measures to be able to raise the needed revenue to continue servicing its debt.
The rating further worsens the woes of the local currency as the cedi on the back of the rating action is expected to decline in value to the dollar as a consequence of dollar outflows following the rating action – this is because enough dollars are needed to maintain or firm up the value of the cedi, hence more dollar outflows will mean less dollar reserves to support the cedi.
Hopefully, the Balance of Payments support programme requested from the IMF by government, will help rectify the current challenges facing the economy with a possible return to the international capital market (Eurobond market).