The Government of Ghana’s long-term issuer ratings have been lowered by Moody’s to Ca from Caa2 or further junk status, and the outlook has been altered to stable.
The review for the downgrade that was started on September 30, 2022, comes to an end now.
“The Ca rating reflects Moody’s expectation that private creditors will likely incur substantial losses in the restructuring of both local and foreign currencies debts planned by the government as part of its 2023 budget proposed to Parliament on 24 November 2022″, a statement published on its website said..
The statement pointed out that “given Ghana’s high government debt burden and the debt structure, it is likely there will be substantial losses on both categories of debt in order for the government to meaningfully improve debt sustainability”.
It went on to say that the stable outlook strikes a balance between Moody’s presumption that the debt restructuring will take place in consultation with creditors and under the auspices of a funding program with the IMF, and the possibility of a less orderly form of default that could result in greater losses for private-sector creditors.
Additionally, Moody’s announced that it had completed the concurrent reviews for downgrading by lowering the ratings of Ghana’s senior unsecured debt to Ca from Caa2 and the senior unsecured MTN program to (P)Ca from (P)Caa2, as well as lowering the rating of Ghana’s bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) to Caa3 from Caa1. The latter shows a combined projected loss consistent with an increase in issuer rating of one notch.
“Finally, Moody’s has lowered Ghana’s local currency (LC) and foreign currency (FC) country ceilings to respectively Caa1 and Caa2, from B2 and B3, mirroring the downgrade of the sovereign ratings by two notches”, it stressed.
“Non-diversifiable risks are captured in a LC ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and government actions, limited domestic political risk, and low geopolitical risk; balanced against a large government footprint in the economy and the financial system and external imbalances. The FC country ceiling one notch below the LC country ceiling reflects constraints on capital account openness and very weak policy effectiveness against authorities’ history of providing access to foreign exchange”, it added.
Rationale For Rating
A considerable loss for private creditors is anticipated as a result of the restructuring of domestic and foreign currency loans that the government announced on November 24, 2022 as part of its budget proposal for 2023.
Since the government has been struggling with mounting and expensive debt for more than a year, there are less and fewer policy levers available to stop the downward spiral of rising debt, weakening local currency, high inflation and high interest rates.
As a result, debt restructuring has become increasingly apparent as a prerequisite to ensuring debt sustainability. Furthermore, Moody’s believes that significant losses to creditors as part of the debt exchange are likely given the structure of government debt, which is equally split between foreign and local currency, its elevated level (forecast at 104% of GDP by the end of this year), and cost (interest payments should consume 58% of revenue in 2022).
The stable outlook is mostly a result of Moody’s assumption that the debt restructuring will take place with creditors in a planned and organized way under the auspices of an IMF funding package.
With the help of Ghana’s economy and institutional structure, the possibility of private-sector creditors suffering greater losses than those currently anticipated by Moody’s is largely kept under check.
Environmental and Governance Concerns
Ghana’s ESG Credit Impact Score is extremely low (CIS-5), which reflects the country’s considerable social risk exposure. Because of the low wealth and high debt levels, resilience to environmental and social threats is quite low.
It said Ghana’s credit description is tolerably exposed to environmental risks (E-3 issuer profile score), adding “the cocoa sector is a large contributor to GDP, exports and employment and being demanding in water, it exposes the country to climate changes and especially droughts. More generally, the size of the agricultural sector exposes the economy to weather-related disruptions and the effects of climate change. Ghana is also exposed to water management risks stemming from a lack of access to potable water in some areas”.
“The exposure to social risk is highly negative (S-4 issuer profile score), driven by limited access to quality housing and education, especially in rural areas. Risks related to health and safety and access to basic services are moderately negative. While the government has put in place measures aimed at reducing poverty and inequality and strengthening social safety nets, its fiscal challenges constrain its scope for meaningful reduction in social risks given more than half of government revenue is consumed by interest payments”, it added.
Overall, Ghana’s institutions have demonstrated some effectiveness, but issues with domestic revenue mobilization and significant limitations on the effectiveness of fiscal policy are manifest in very weak debt affordability, the report noted, adding that the country’s governance is very highly negative with a G-5 issuer profile score.
On the revenue and competitiveness front, the authorities have implemented some institutional reforms, but it will inevitably take time for them to bear fruit.
It said that the government’s intention to use a debt restructuring, which is considered a default by Moody’s, in order to increase its sustainability ultimately reveals institutional weakness. The rating decision made today is influenced by governance factors.
This credit rating action was released on a date other than the one listed in the sovereign release calendar on www.moodys.com because to the increased default risk brought on by Ghana’s declaration of a plan to restructure debt. Additionally, the conclusion of the review had to change from the previously planned date in the calendar for sovereign release because the ratings had been under evaluation for downgrade.
Adam Ibrahim
Adam is passionate about politics and issues that affect governance. As a writer, he channels his energies into writing on pertinent national and political issues for the good of the Ghanaian people.
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