Fitch Ratings downgrades Ghana’s sovereign debt to restricted default
Fitch Ratings has downgraded Ghana’s Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to restricted default (RD) from ‘CCC’, citing missed payments on some local-currency-denominated bonds issued prior to the domestic debt exchange programme (DDEP). This reversal follows Fitch’s decision last month to upgrade Ghana’s LTLC IDR to ‘CCC’ from ‘RD’, based on the completion of the local debt restructuring programme effective February 21, 2023.
According to Fitch, missed payments on bonds that were not tendered or held by ineligible entities for participating in the domestic debt exchange have led to the downgrade. In a note on the subject, the rating agency said that “the downgrade of Ghana’s LTLC IDR to RD reflects the missed payments on some local-currency-denominated bonds that were not tendered or that are held by entities not eligible for participating in the domestic debt exchange.”
Ghana’s government announced last month that it was resuming payments on local-currency bonds issued prior to the domestic debt exchange, but only coupon payments on the two-year note that matured on February 20, 2023 and the 20-year note maturing in 2039 had been made, with the principal payment on the former note still outstanding. The authorities have acknowledged that 35 payments, whether principal or coupon, were due on the outstanding ‘old bonds’ between January 20, 2023, and April 20, 2023.
Following a meeting with representatives of individual bondholders and pension funds, the government announced that it had reached an agreement on a pathway toward the settlement of the outstanding debt obligations by April 28, 2023. However, Fitch has expressed concerns over whether missed payments will be settled to all categories of holders of ‘old bonds’ or only to specific categories.
Moreover, Fitch has downgraded to ‘CC’ from ‘CCC’ the issue rating of five local-currency bonds issued prior to the debt exchange and has subsequently withdrawn the rating on these securities due to the limited information and uncertainty regarding the timely servicing of the securities issued before the domestic debt exchange.
Despite a substantial redemption reprofiling and significantly lowered interest rates, Fitch estimates that the present value of public debt-to-GDP has been reduced by only 1 percent to slightly above 100 percent of GDP (in present value terms) using the standard 5 percent discount rates that apply in the IMF/World Bank debt sustainability framework for low-income countries.
Fitch also noted that IMF support for Ghana will likely depend on the government’s ability to show a path toward bringing the present value of debt to 55 percent of GDP over the forecast horizon on the basis of the IMF/World Bank debt sustainability analysis and the ability of official bilateral creditors to provide financing assurances in the context of the Common Framework of external debt restructuring that authorities have requested.
“The provision of financing assurances, which will pave the way for an IMF Board approval of the ECF arrangement and for a new debt sustainability analysis to be published, is not expected before the end of 2Q23,” Fitch added.
The LTFC IDR was downgraded by Fitch to ‘RD’ from ‘C’ on February 21, 2023, following the expiration of the grace period for a missed Eurobond coupon payment, while the issue rating on Ghana’s US dollar-denominated notes due October 2030 was downgraded to ‘CC’ from ‘B-‘ on December 21, 2022.
Fitch stated that once it receives satisfactory confirmation that Ghana has settled all the missed payments, it will assign Ghana’s LTLC IDR based on a forward-looking assessment of its willingness and capacity to honour its local currency debt.
