REDD Intelligence says Ghana may apply for debt restructuring under G20’s Common Framework
International research firm, REDD Intelligence, posits that Ghana may apply for a debt restructuring programme under the G20’s Common Framework.
According to the agency, Ghana’s application for debt restructuring will be occasioned by the country’s failure to access the international capital market in the first-half of 2022 on the back of rising interest rates on its international bonds.
Ghana, REDD Intelligence notes, faces severe financing challenges ahead of the presentation of the 2022 budget in mid-November, as a sharp sell-off in its Eurobonds brings doubts over its continued access to international capital markets financing.
“If Ghana remains closed out of the international financial market in half-year 2022 then there is an increased likelihood the government may consider applying for a debt restructuring under the G20 Common Framework. This is somewhat earlier than our previous assumption that such an application could materialize in 2023-24.
“The sharp sell-off in Ghana’s Eurobonds during October 2021 has locked the government out of external commercial financing for what could be an extended period. This makes the government even more reliant on domestic borrowing than expected in the fourth quarter of 2021 and going into 2022.
“Increased skepticism over the government’s ability to finance itself is likely to result in continued repatriation of non-resident funds from the domestic debt market in 4th quarter of 2021, which will add to the financing squeeze. The government could present some deficit-cutting measures in 2022, budget but investors are likely to demand more than optimistic revenue forecasts for Ghana’s Eurobond yields to close the gap with peers such as Kenya and Nigeria and fall to levels where new bond issuance would be feasible,” noted the agency.
The G20 Common Framework developed together with the Paris Club, beyond the Debt Service Suspension Initiative, provides debt treatments for Low-Income Countries facing unstainable debt.
REDD Intelligence had earlier stated that the government would borrow heavily on the domestic market during the second half of the year, even if it had retained access to commercial external financing.
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According to REDD, government’s decision to borrow heavily on the domestic market despite having access to the capital market is because “the government has as expected, made limited progress on closing the large fiscal deficit, which reached 15.2% of GDP (on a cash basis) in 2020, according to the International Monetary Fund. The half-year fiscal data showed a continued underperformance in government revenue with most of the expenditure restraint being in domestic interest payments. These interest payments REDD Intelligence said are likely to have been deferred and, if so, will need to be made at some point.”
In a related development, credit rating agency, Fitch Ratings has also stated that Ghana will have no other choice than to opt for IMF financing should the country’s liquidity or financing needs continue to increase.
According to Fitch Ratings, despite the government’s resolve to not go back to the IMF and pursue a regular IMF programme due to the conditionalities to be imposed on the country coupled with debt restructuring programmes to be undertaken which ultimately sends signals of the country’s struggle to service its debts to investors, it [Fitch Ratings] believes Ghana going back to the IMF would not entail a debt restructuring programme.
Adding that an IMF support at this time would rather bolster investor confidence, and could help Ghana regain access to international debt markets given that Ghana’s effective loss of access to international markets increases risks to its ability to meet medium-term financing needs.
“We believe that macroeconomic stresses and pressures on liquidity would probably intensify if Ghana remains unable to issue and does not seek timely support from the IMF,” noted Fitch.
Fitch notes that, the medium-term outlook for Ghana’s finances remains challenging as the country’s problems have been exacerbated by the Covid-19 pandemic.
Revenue, the agency asserts, remains structurally low with very high-interest costs thereby projecting general government interest expense at almost 47% of revenue in 2022 which is well above the median for ‘B’ rated sovereigns of 11%.
According to Fitch, government’s current fiscal consolidation strategy offers a path to debt sustainability, but the country’s gradual pace of deficit reduction leaves it vulnerable to slippage risks.
