Ghana’s credit rating may be cut by Fitch if debt is restructured in IMF Talks
Ghana’s sovereign credit rating may be downgraded closer to default by Fitch Ratings should talks with the International Monetary Fund on a record new $3 billion funding package lead to debt restructuring.
If that happens, Fitch would likely lower the country’s long-term issuer default rating to RD from CC, Jan Friederich, head of EMEA Sovereign Ratings, said in a phone interview.
Ghana hopes to use fresh money from the IMF extended credit facility program under discussion to boost its finances and regain access to global capital markets. Investors have been concerned about the financial health of Africa’s second-biggest gold producer, whose public debt was 68% of gross domestic product at end-July, according to central bank data.
“If a debt restructuring is part of the agreement with the IMF then, in terms of default risk, that will supersede any benefit from the financing support that Ghana might get from the IMF,” Friederich said from Hong Kong on Oct. 27.
“A restructuring would likely lead to the relevant rating being placed in restrictive default,” he said. That rating is assigned to an issuer that, in Fitch’s opinion, “has experienced an uncured payment default or distressed debt exchange” on a bond or loan but hasn’t entered into bankruptcy or some other form of administration.
The existing CC rating “means that default is probable, with a higher chance than 50%,” Friederich said.
Default Risk
In September, Moody’s cut its rating on Ghana’s long-term foreign debt to Caa2 from Caa1, citing macroeconomic deterioration which was “heightening the government’s liquidity and debt sustainability difficulties and increasing the risk of default.”
Ghana began formal negotiations for the extended credit facility program with the IMF in September. The world’s second-largest cocoa producer sought help from the Washington-based lender after homegrown policies, including cutting 2022 discretionary expenditure by as much as 30%, failed to stop investors from dumping its Eurobonds. The currency depreciated at a faster pace and debt-service costs soared.
When Fitch downgraded its assessment in September for the third time this year, it said there was a “high likelihood” that the proposed IMF support program would require some form of debt treatment, due to climbing interest costs and structurally low revenue as a percentage of gross domestic product.
Fitch estimates that Ghana’s government faces interest payments this year equivalent to 44% of revenue, rising to slightly above 50% next year. That compares with a sub-Saharan African median of about 14%, according to the ratings agency.
Local Debt
Bloomberg reported in September that Ghana was considering reorganizing part of its 190.3 billion cedis ($13.6 billion) of local debt, as part of the talks with IMF. A committee was formed last month to solicit views from bondholders for a debt management strategy.
“We would be looking at which part of the debt will be affected,” Friederich said. “There are still open questions about what decisions they are going to make about the inclusion of local currency or foreign currency debt; we assume for the time being that both will be incorporated.”
Ghana’s 2030 dollar bonds may be excluded from any restructuring because they were partially guaranteed by the World Bank, he said.
