Resumption of local bonds payments triggers credit rating upgrade by Fitch
Ghana has recently undergone a domestic debt exchange, a transaction viewed by Fitch as a distressed debt exchange in the context of heightened fiscal pressures and a lack of access to international capital markets. The country’s interest costs amounted to 54% of revenues in the half-year 2022, indicating significant fiscal pressures. However, the resumption of payments on local currency bonds has triggered an upgrade of Ghana’s credit rating by Fitch.
The move by the Ghanaian government to resume payments on local currency bonds is significant, as it cures the default on LC debt that had been a concern for investors. Fitch has noted this as the reason behind the upgrade of Ghana’s long-term local currency issuer default rating (LTLC IDR). However, despite this development, the country remains in the junk status.
The domestic debt exchange is expected to enable Ghana to reduce its interest payments in 2023 by around 10% of expected revenues, equivalent to 1.6% of Gross Domestic Product (GDP), according to Fitch’s predictions. Additionally, Fitch estimates that gross financing needs for the country this year will be reduced by 5% of GDP. The debt exchange is expected to lower interest payments by 6% of revenues, or 0.9% of GDP, in 2024.
While the domestic debt exchange has resulted in a reduction of interest payments and financing needs for the country, Fitch has highlighted the critical solvency concerns that still persist. The debt-to-GDP ratio has increased by 0.6 percentage points, and the present value of public debt-to-GDP is still slightly above 100% after the completion of the exchange.
Despite a substantial redemption re-profiling and significantly lowered interest rates, the present value of public debt-to-GDP has only been reduced by one percentage point using the standard 5% discount rates that apply in the International Monetary Fund/World Bank debt sustainability framework for low-income countries. This indicates that Ghana still has some way to go in terms of achieving a sustainable level of debt.
Overall, while the resumption of payments on local currency bonds has been a positive development for Ghana, solvency concerns remain a critical issue. The country’s recent domestic debt exchange has enabled it to reduce interest payments and financing needs, but more work needs to be done to achieve long-term fiscal sustainability.
