Moody’s Investor Services, has stressed that low growth after the coronavirus shock, weak government revenues, low oil prices, and energy sector contingent liability risks are among the major challenges that could curtail the country’s creditworthiness.
The credit rating agency has also noted that, a weakened government mandate resulting from a diminished parliamentary majority will further complicate fiscal and economic reform prospects for Ghana.
The assertion by Moody’s follows the re-election of the President Akufo-Addo-led government in the just ended December 7, 2020 polls.
‘’The returning administration will continue to face key challenges constraining Ghana’s creditworthiness, including low growth after the coronavirus shock, weak government revenues, low oil prices, and energy sector contingent liability risks. Moreover, a weakened mandate resulting from a diminished parliamentary majority will further complicate fiscal and economic reform prospects,” said Kelvin Dalrymple, a Vice President and sovereign analyst at Moody’s.
Moody’s in September this year, downgraded Ghana’s economy to B3 Negative due to the country’s mounting debt and deplorable fiscal situation.
According to the rating agency, the country’s credit profile reflects high debt burden and weak debt affordability challenges, a track record of revenue underperformance relative to targets, and elevated exposure to international capital flow reversals.
A situation Moody’s says, has been exacerbated by the coronavirus pandemic outbreak.
Ghana’s debt to GDP, as reported by the Central Bank, is now 71 per cent crossing the 70 per cent accepted benchmark and is further projected to reach 76.7 per cent end-2020.
Moody’s post-election report on Ghana’s economy indicate that interest payments on debt, is set to rise to 6.8 per cent of GDP, up from 5.4 per cent of GDP in the budget, thereby, consuming close to 50 per cent of total revenue.
It is against this background that the rating agency compares the country to a Highly Indebted Poor Country (HIPC) economy.
“We assess Ghana’s final fiscal strength score at ‘caa3’, below the scorecard-indicated outcome of ‘caa1’. This adjustment mostly reflects weak debt affordability, one of the weakest among the countries that we rate, with interest-to-revenue close to 50 per cent in 2020, that is usually discounted for HIPC/IDA countries under our methodology. The adjustment also captures risks associated with contingent liabilities that will continue to weigh on fiscal strength,” the Moody’s report said.
Moody’s notes that a further weakening in debt affordability amid persisting refinancing risks would indicate a fundamental deterioration in government’s debt-service capacity, resulting in another downgrade at the next rating.
Another area of concern expressed by Moody’s is government’s reliance on the central bank to finance the budget, a practice that came to a halt after the country entered an IMF External Credit Facility (ECF) years ago.
“We also expect government’s reliance on the central bank to finance these deficits to further weaken the country’s external position. The government’s increased reliance on central bank financing for fiscal and quasi-fiscal activities risks undermining the efforts made by the authorities in building a sound macroeconomic framework during the previous IMF programme, which helped to usher in significant portfolio inflows.”
“A prolonged increase of the monetary base to finance the government deficit as well as other quasi-fiscal activities would weaken the sustainability of the country’s external position and impair the ability of the sovereign to finance its rising debt burden,” read parts of the report.
On the other hand, Ghana’s rating can be upgraded if financing pressures reduce, either from increasing evidence that the government is able to limit the increase in funding needs or confident it will be able to secure sufficient funding at moderate costs.
“Over the medium term, a stabilization and reduction in the debt-service ratio would ease refinancing risks and support an improvement in debt-affordability metrics. The implementation of measures that would arrest the rise in the direct and contingent debt burden and give confidence that the burden would fall will also support a return of the outlook to stable. Ultimately, as the current pressures dissipate, the positive drivers of the rating identified in the action in January could be expected to reemerge,” said Moody’s.
