The Government of Ghana has questioned the latest downgrade by one of the rating agencies– Moody’s and subsequently called for needed reforms within credit rating agencies.
The Ministry of Finance in a statement responding to the downgrade, indicated that the concerns raised by Moody’s has been dealt with in the 2022 budget and as such, confused about the rating agency’s perceived deterioration of Ghana’s institutional strength.
“According to Moody’s, the downgrade is due to ‘increasingly difficult task government faces in addressing the intertwined liquidity and debt challenges, pandemic induced revenue underperformance, tight funding conditions on international markets materially decreasing governance and institutional strength and inflexibility in the government budget.’
“[Government] believes that the recent fiscal consolidation measures as announced by the Finance Minister and the 2022 budget which is anchored on debt sustainability and a positive primary balance largely addresses these concerns. We are at odds to understand Moody’s assertion of the deterioration of Ghana’s institutional strength given Ghana’s reputation as a beacon of democracy in Africa.”
Finance Ministry
According to the government, Moody’s decision to justify the stable outlook is contradictory. The government, therefore, called for reforms in the conduct of the rating agencies, noting that their actions are having negative consequences on countries, especially those in Africa.
“In a clearly contradictory manner, Moody’s justifies the stable outlook despite the downgrade to Caa1 by acknowledging government’s strong track record in delivering effective fiscal polices and the maintenance of a variety of funding sources.
“Perhaps this singular action by Moody’s confirms the notion held by many that there is an urgent need for reforms in the conduct of rating agencies given their ownership structure and the ramifications that their actions have on sovereigns especially in Africa. The call for rating reforms which was loud during the peak of the Covid 19 pandemic must be reviewed as a matter of urgency.”
Finance Ministry
Moody’s Investors Service (“Moody’s”) on Friday, February 4, downgraded the Government of Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable from negative.
Moody’s also downgraded the senior unsecured MTN programme ratings to (P)Caa1 from (P)B3 and the backed senior unsecured debt rating to B3 from B1.
The downgrade to Caa1 reflects the increasingly difficult task the government faces addressing its intertwined liquidity and debt challenges. Weak revenue generation constrains government’s budget flexibility and tight funding conditions on international markets have forced the government to rely on costly debt with shorter maturity.
Moody’s estimated that interest payments will absorb more than half the government’s revenue over the foreseeable future, which is exceptionally high compared to peers at all rating levels. As a remedy, the government has proposed sharp fiscal consolidation and a switch to borrowings from external partners on more favourable terms.
However, the strategy comes with sizeable implementation risks, especially in a still-fragile post-pandemic environment, while international market creditors price in very wide risk premia. Meanwhile, Ghana’s external buffers and moderate external debt amortization schedule in the next few years afford the government a window of opportunity to deliver on its strategy, balance of payments pressures will build up the longer government’s large financing requirements have to rely on domestic sources.
The stable outlook balances Ghana’s significant fiscal challenges, large refinancing needs and constraints on access to funding against the government’s pre-pandemic track record of relatively effective policy delivery and maintenance of a variety of funding sources. Ghana’s institutional framework and dynamic economy remain key credit supports, with economic growth forecasts of around 5% over the medium term.
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