S&P downgrades Ghana: What it means and its implications
S&P Global Ratings on Friday, August 5, 2022, downgraded Ghana’s sovereign debt to CCC+/C, pushing the country’s debt further into speculative territory.
This is after it affirmed Ghana’s sovereign debt at ‘B-‘ with a stable outlook in February this year.
In its February rating action, S&P noted Ghana remains constrained by weak public finances, although recent commitments by the governing party to impose a 20% cut to discretionary spending will, under its projections, reduce expenditure by over 1% of GDP during 2022.
“This implies a 2.8 percentage point (ppt) narrowing of the headline cash general government deficit to 9.4% of GDP in 2022, including arrears payments of 0.4% of GDP and energy sector transfers of 1% of GDP (versus the government’s projection of 7.9% of GDP for the overall cash deficit),” it said.
It however, added that, stepped up fiscal consolidation and solid growth should put debt to GDP on a downward path.
However, in its August 5 rating action, S&P said its outlook for the country is negative, “reflecting Ghana’s limited commercial financing options, and constrained external and fiscal buffers.”
According to S&P, the Covid-19 pandemic and the conflict in Russia have magnified Ghana’s fiscal and external imbalances.
Demand for foreign currency has been driven higher by several factors, including non-resident outflows from domestic government bond markets, dividend payments to foreign investors and higher costs for refined petroleum products, the agency said.
The nation has also been affected by a lack of access to Eurobond markets, S&P added.
What the rating action means
Per S&P’s definition, the CCC+/C credit rating means that, an obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
The credit rating given to a company or government can impact on its ability to borrow money.
Ratings with a substantial level of risk attached to them, like CCC+, may have less appeal for investors compared to investment-grade ones.
They’re given to entities that may have trouble paying their debts if things take a turn for the worse.
The implications
The recent downgrade by S&P poses further challenges to government’s resolve to re-enter the international capital markets (Eurobond markets).
It further dampens investor confidence in the Ghanaian economy and consequently results in more capital outflows from domestic government bonds by non-resident investors.
It also raises questions over the efficiency of government’s domestic revenue mobilisation measures to be able to raise the needed revenue to continue servicing its debt.
The rating further worsens the woes of the local currency as the cedi on the back of the rating action is expected to decline in value to the dollar as a consequence of dollar outflows following the rating action – this is because enough dollars are needed to maintain or firm up the value of the cedi, hence more dollar outflows will mean less dollar reserves to support the cedi.
Hopefully, the Balance of Payments support programme requested from the IMF by government, will help rectify the current challenges facing the economy with a possible return to the international capital market (Eurobond market).
Ghana’s debt
The country’s stock of public debt increased to 78.3 percent of GDP (GH¢393.4 billion) at the end of June 2022, compared with 76.6 percent of GDP (GH¢351.8 billion) at the end of December 2021.
Of the total debt stock, domestic debt was GH¢190.1 billion (37.8 percent of GDP), while the external debt was GH¢203.4 billion (40.5 percent of GDP).
Provisional data on budget execution for January to May 2022 indicated an overall broad fiscal deficit on a cash basis of 5.0 percent of GDP, against a programmed target of 3.5 percent of GDP.
The corresponding primary balance for the period was a deficit of 1.4 percent of GDP, against a deficit target of 0.2 percent of GDP. Over the period, total revenue and grants amounted to GH¢29.5 billion (5.9 percent of GDP), below the projected GH¢34.8 billion (6.9 percent of GDP).
Total expenditure was GH¢48.9 billion (9.7 percent of GDP), below the programmed target of GH¢51.8 billion (10.3 percent of GDP).
Ghana’s Gross International Reserves declined to $7.7 billion at the end of June 2022, equivalent to 3.4 months of import cover, compared with $9.7 billion (4.3 months of imports) at the end of December 2021.
