Ghana’s long-term foreign-currency issuer default rating (IDR) has been dropped to B- from B, with a negative outlook by Fitch Ratings, as the country struggles with a mounting debt burden.
The country’s rating downgrade is due to its loss of access to international capital markets in the first half of 2021 following a crisis-related surge in government debt.
In Fitch’s view, Ghana’s ability to deliver on planned fiscal consolidation efforts could be hindered by the heavier reliance on domestic debt issuance with higher interest costs. This is in the context of already exceptionally high interest expenditure to revenue ratio.
Fitch assumes that Ghana will be unable to issue on international capital markets in 2022 and prospects for doing so in 2023 are uncertain.
Ghana’s international reserve position has become highly reliant on annual Eurobond issuance. Moreover, as of July 2021, non-resident investors held just below 20%, $5.8 billion of Ghana’s outstanding domestic government debt.
While the maturity of these holdings is long-term, an outflow would put additional downward pressure on Ghana’s reserves.
Fitch forecasts that Ghana will face approximately $2.7 billion, 3.3% of GDP, in external interest service and amortisation payments in 2022.
The rating agency believes that the government can meet its external debt servicing without market access given its reserves, which it estimates at $7.9 billion at end of 2021. This represents 3.2 months of current external payments.
Reserves were bolstered by $3 billion in Eurobonds in the second half of 2021. This helped the government to meet its approximately $3.5 billion, 4.7% of GDP in external debt servicing costs last year. The reserves were additionally bolstered by the $1 billion IMF SDR allocations.
The rating agency forecasts net external debt to fall to 25% of GDP in 2022 and further in 2021. The cedi remained broadly stable throughout 2020 and 2021.
Fitch estimates that Ghana’s GDP growth accelerated to 4.7% in 2021 from 0.4% in 2020. The rating agency forecasts growth to increase further to 5.5% in 2022, as the industrial sectors, including oil, recover in line with global growth recovery.
Ghana experienced three years of strong growth prior to 2020, largely driven by increasing oil production.
Fitch expects oil production to increase to 190 thousand barrels per day (kbpd) in 2022, from an estimated 160 kbpd in 2021. However, this will remain flat through 2023, which will limit Ghana’s medium-term growth potential.
The rating agency expects post-crisis growth recovery to keep GDP growth potential around 5%.
Fitch forecasts average annual inflation to decelerate slightly to 9% in 2022 after averaging 9.8% in 2021.
Global supply chain issues fed through to domestic inflation, as did higher energy prices. The Bank of Ghana raised its main policy rate by 100bp to 14.5% in November 2021, reversing the 100bp cut that came in May.
Fitch envisages additional rate hikes in 2022, which could further exacerbate the government’s domestic debt interest costs.
Ghana’s external position will continue to be supported by a structural shift in the current account balance.
Fitch estimates that the current account deficit widened to 3.4% of GDP in 2021, from 3.2% in 2020, as imports recovered and exports remained flat on a nominal basis.
An increase in gold and oil exports will help the current account deficit to narrow to 3.1% in 2022. Ghana’s current account deficit averaged 7% of GDP in the 10 years prior to 2017, when oil production reached significant levels.
Fitch also expects that the overall external balance will improve as FDI increases in 2022 and 2023. Higher FDI flows and lower fiscal financing needs will help reduce Ghana’s overall external indebtedness.
Fitch forecasts the general government fiscal cash deficit to narrow to 9.1% of GDP in 2022 from 15.1% in 2020 and 12.5% in 2021. This includes 3% of GDP in domestic arrears clearance and payments related to the state-owned energy sector.
The 2022 deficit would still be more than twice the 2022 B median of 4.6% and risk to public finances remain high.
The government envisages a deficit, including financial and energy sector support, of 7.4% in 2022 and 5.5% in 2023, with a fall to below the legal deficit ceiling of 5% in 2024.
Government’s fiscal consolidation plans are focused on revenue measures adopted in the 2022 budget. This is including a new 1.75% e-levy on certain digital transactions and changes to the calculation of certain taxes and import duties. The medium-term fiscal framework envisages that these new revenue measures, together with fading crisis-related expenditure, will drive an increase in government revenue to 20% of GDP in 2022 from an estimated 15.4% in 2021.
Fitch believes that Ghana will achieve moderate medium-term fiscal consolidation, but that the government’s forecasts are overly optimistic.
The rating agency forecasts the fiscal deficit will narrow by significantly less, to 9.5% of GDP in 2022 and approximately 8% in 2023. This is as government revenue experiences a smaller increase.
Ghana has struggled with earlier efforts to raise revenue to GDP and public finances were deteriorating even before the crisis, albeit partly related to the clean-up in the financial and energy sector.
General government debt reached an estimated 83% of GDP at end of 2021, including approximately 2% of GDP in debt held through the energy sector levy act special purpose vehicle.
Fitch forecasts government debt to remain on an upward path through 2025, but expect debt to grow at a slower pace as the primary deficit narrows in 2022 and 2023.
Debt affordability metrics will remain weak. Ghana’s debt constitutes 539% of government revenue, compared with the B median of 325%.
Interest payments were 44.6% of revenue in 2020 and the ratio is likely to continue rising through 2023. This is assuming a rising share of domestic debt in total debt in the absence of external financing options.
Given the slow pace of private sector credit growth and the weak asset quality environment, Fitch expects that the domestic lenders will be able to meet the government’s increased reliance on domestic debt issuance.
In 2020, the government placed approximately $1.6 million (GHS10 billion), 2.7% of GDP, with the Bank of Ghana as an emergency measure. This measure could be repeated in response to additional shocks, but would carry risks to macroeconomic stability.
Moderate public debt interest service and very long average debt maturity stemming from access to official concessional financing, and stronger governance indicators relative to peers support the rating.
Fitch would downgrade the rating further if there was a decline in international reserves sufficient to lead to increased financing stress. This could arise as a result of a prolonged lack of access to international capital markets or from an outflow of non-resident investors from the domestic debt market.
The rating agency would also downgrade Ghana if there was further deterioration in fiscal liquidity conditions or signs of difficulty in meeting debt servicing costs.
Fitch would upgrade the rating if there was a sustained resumption of the country’s access to international capital markets, or a sustained improvement in Ghana’s external liquidity.
Greater confidence in the government’s ability to source external financing, and place onto a downward path public debt to GDP would also lead to an upgrade.
This comes after Ghana’s long-term issuer rating was affirmed at B3, with a negative outlook, by Moody’s Investors Service as the country struggles with a high debt burden – in 2021.