International Rating Agency, Fitch, has downgraded Ghana’s Long-Term Local and Foreign-Currency Issuer Default Ratings (IDRs) further to ‘junk status’, from ‘CCC’ to ‘CC’.

This is the second time in 2022 that it has downgraded Ghana’s credit worthiness. A rating of ‘CC’ means Ghana is in the ‘Non-investment grade’ which implies the country is highly vulnerable with very speculative bonds.

According to Fitch, the downgrade reflects the increased likelihood that Ghana will pursue a debt restructuring given mounting financing stress, with surging interest costs on domestic debt and a prolonged lack of access to Eurobond markets.

“There is a high likelihood that the International Monetary Fund support programme currently being negotiated will require some form of debt treatment due to the climbing interest costs and structurally low revenue as a percentage of Gross Domestic Product.

“We believe this will be in the form of a debt exchange and will qualify as a distressed debt exchange under our criteria”.
Fitch

The downgrade followed just two days after President Akufo-Addo took a swipe at rating agencies at a UN Conference for unfairly assessing and rating African countries poorly at a time the global economy was going through difficult period.

According to President Akufo-Addo, “the financial markets have been set up and operate on rules designed for the benefit of rich and powerful nations, and, during times of crisis, the façade of international co-operation, under which they purport to operate, disappears.”

The government has not confirmed or denied press reports that Ghana is preparing to negotiate a restructuring but the rating agency stated that interest costs on external debt are lower than for domestic debt and near-term external debt amortisations appears manageable.

“However, we believe there could be an incentive to spread a debt restructuring burden across domestic and external creditors and therefore do not have a strong basis to differentiate between Foreign- and Local-Currency ratings at this time. “
Fitch

High debt service, financing constrained

The country’s interest costs reached 47.5% of revenue in 2021 and 54% in the first half of 2022. Interest payments on domestic debt also hovered around 75% of total interest costs.

This, Fitch noted, reflects high yields on domestic debt, which have climbed following a 34% year-on-year spike in inflation as of August 2022 and monetary tightening, with the Bank of Ghana hiking its policy rate to 22.0%, from 14.5% in February 2022.

Again, yields on the 91-day Treasury bill reached 27.0% in August 2022, up from 12.5% in August 2021, whilst 10-year yields have spiked to above 35% in September 2022, from around 20% in quarter one 2022, it added.

Limited access to external financing

Fitch also indicated that it expects external financing access to stay limited until at least an IMF programme is agreed, as Ghana is likely to remain locked out of Eurobond markets, which had been the country’s regular source of external financing. The negotiations with the Fund are expected to be concluded by the end of the year.

The government obtained a $750 million term loan from African Export-Import Bank (BBB/Stable this year and $250 million in syndicated loans from global commercial banks. It can also use its sinking fund.

“We estimate Ghana faces around $3 billion of external debt service costs in 2023, including amortization and interest.”
Fitch

International Monetary Fund ranked Ghana 1st in Africa as the country with the largest outstanding debt. According to the Fund’s Quarterly Finances as of the end of July 2022, the country’s loans outstanding is estimated at 1.31 billion Special Drawing Rights equivalent to about $1.69 billion.

The country’s loans outstanding to the IMF represent 9% of the total number of African countries indebted to the Fund. It is also equivalent to 178% of its quota or share of monies borrowed from the Fund.