Ghana’s long-term issuer rating has been kept at B3, with a negative outlook, by Moody’s Investors Service as the country struggles with a high debt burden.
Moody’s has also affirmed Ghana’s foreign currency senior unsecured debt ratings at B3, while the senior unsecured medium-term note (MTN) programme rating has been kept at (P)B3.
The B3 rating and negative outlook reflect Ghana’s high debt burden that is unlikely to fall rapidly and continued weak debt affordability.
This rating also reflects high gross borrowing requirements and ongoing liquidity challenges in the face of downside economic, social and financial risks in the aftermath of the coronavirus disease 2019 (COVID-19) crisis.
The country’s credit profile is characterised by large gross borrowing requirements that exceed 20% of gross domestic product (GDP).
Ghana’s credit profile is additionally characterised by persistent weak debt affordability stemming from interest payments rising to over 40% of revenue. These are among the weakest of country’s rated by Moody’s, underpinning its exposure to potential funding shocks.
Both long-standing credit characteristics are the result of a high debt burden financed at relatively high costs and relatively short maturities. These vulnerabilities have been exacerbated by the crisis.
The fiscal deficit widened to 13.9% of GDP in 2020, inclusive of costs associated with the financial sector clean-up and take or pay energy contracts, pushing the debt burden beyond 80% of GDP, from 62.6% in 2019.
Government’s most recent budget sets out a plan of fiscal consolidation to reduce the fiscal deficit to 4.8% of GDP by 2024. However, the longer-term economic and social scarring from the coronavirus shock presents significant challenges to achieving such ambitious targets.
Moody’s assumes that the pace of consolidation will be slower, leaving the debt burden above 80% of GDP for the foreseeable future.
In the meantime, Ghana will increasingly rely on domestic and international bond issuance to meet deficit financing requirements and Eurobond maturities starting 2023 and rising to $1 billion per year between 2025 and 2027. This leaves the country exposed to a potential unfavourable turn in investor confidence.
Downside risks notwithstanding, Ghana’s credit profile benefits from strong economic growth potential.
Moody’s expects GDP growth to rise towards 6% in 2022 and stay around these rates in the medium term – in the absence of new shocks.
Meanwhile, Ghana’s external position which has been a credit weakness in the past, has remained relatively stable through the crisis, denoting greater resilience.
The current account deficit was stable last year, at 2.6% of GDP; assuming steady commodity prices, Moody’s expects the deficit to remain relatively narrow around 3% of GDP.
However, the rating agency is optimistic about improving growth prospects, resilient external sector performance and Ghana’s continued access to domestic and international capital market. These are reflected in the affirmation.
Capital markets are supported by government’s structural economic reform agenda to improve export competitiveness and broaden the revenue base.
Ghana’s local currency (LC) country ceiling remains unchanged at Ba3 and the foreign currency (FC) country ceiling unchanged at B1.
Foreign exchange reserves, at four months of imports cover, have been bolstered by the recent Eurobond issuance and gold and cocoa production that continues to perform well.
Coupled with the ramping up of oil and gas production from the Pecan field, export prospects remain favourable.
Ghana also has a track record of political stability and relatively sound institutional and governance frameworks compared to peers, most recently demonstrated in the peaceful elections in late 2020.
This is in addition to continued implementation of the economic reform agenda to improve export competitiveness and broaden the revenue base.
Moody’s may upgrade Ghana’s rating if there is an effective domestic revenue mobilisation plan that bolsters debt affordability, creating more fiscal room for manoeuvre, and lowers government liquidity risks.
However, given Ghana’s negative outlook, a rating upgrade is unlikely in the near term. Nevertheless, Moody’s may lift the outlook to stable if the fiscal consolidation plan leads to the arrest, and eventually a markedly downward trajectory in the debt burden over time.
Moody’s would downgrade the rating if it were to conclude that liquidity pressures over a prolonged period were likely to create significant fiscal challenges.
Additionally, increasing evidence that Ghana will be unlikely to raise revenue and contain expenditure resulting from slow fiscal consolidation would also likely lead to a downgrade.
This comes after Ghana’s long-term foreign-currency issuer default rating’s (IDR) outlook was dropped to negative from stable, by Fitch Ratings, earlier in 2021.