Ghana among African countries with record high sovereign default rating
Sovereign defaults have been on the rise since 2020, according to a new report by Fitch Ratings. The report highlights a marked increase in the number of default events, with 14 separate incidents occurring across nine different sovereigns, in contrast to the 19 defaults that occurred across 13 different countries between 2000 and 2019.
Furthermore, Fitch rated a record five sovereigns at default, including Belarus, Lebanon, Ghana, Sri Lanka, and Zambia, while eight sovereigns were rated at ‘CCC+’ or below, with an additional nine at ‘B-’.
The report identifies several contributing factors to this trend. Firstly, the average cumulative five-year default rate between 1995 and 2021 for sovereigns rated ‘C’ to ‘CCC+’ by Fitch was 40.6%, indicating a significant risk for these countries.
Additionally, the median general government debt/Gross Domestic Product (GDP) ratio of Fitch-rated sovereigns rose steadily from 31% in 2008 to 48% pre-Covid-19 pandemic. This increase was facilitated by frontier markets’ easier access to the Eurobond market and borrowing from China.
However, when the pandemic hit, frontier markets with limited buffers were poorly placed to cope with the severe shocks, which were further exacerbated by the impact of Russia’s invasion of Ukraine on food and energy prices, global inflation, and the subsequent abrupt tightening in monetary policy.
The report also highlights that, on average, sovereign defaults in 2020-2022 are taking longer to resolve. The median duration of defaults for Fitch-rated sovereigns since 2020 is 107 days (and five are uncured) compared with 35 days for all defaults since 2000. This trend is troubling, as slow restructurings do not serve the interests of either debtors or creditors and add to the cost of financing.
Finally, the report discusses the effectiveness of the Common Framework in resolving crises quickly. The Common Framework was intended to facilitate creditor coordination, but Fitch concludes that it is not proving effective in achieving its goals. Widespread reports suggest that weak coordination among Chinese stakeholders is contributing to delays.
China has also demanded that multilateral debt be included in debt restructuring and that there are no haircuts, just maturity reprofiling. These demands are hindering the resolution of sovereign defaults and could contribute to further delays in the future.
The Fitch report highlights the growing risk of sovereign defaults and the challenges in resolving them quickly. The report underscores the need for policymakers and creditors to work together to find effective solutions that promote stability and sustainability. As the world recovers from the pandemic and its associated economic shocks, this will remain a critical issue for the global financial system.
