Fitch, an international rating agency, has upgraded Ghana’s Long-Term (LT) Local-Currency (LC) Issuer Default Rating (IDR) to ‘CCC’ from ‘RD’.
The upgrade of the ratings on Ghana’s LC denominated debt follows the completion of the Domestic Debt Exchange Programme by Ghana in February 2023. However, Fitch viewed the transaction as a distressed debt exchange in a context of heightened fiscal pressures, with interest costs amounting to 54% of revenues in half-year 2022, and lack of access to international capital markets.
Again, the resumption in payments on Local Currency bonds that cures the default on LC debt also triggered the upgrade of Ghana’s credit rating. Despite this, the country still remains in the junk status.
Two principal payments on bonds issued prior to the domestic debt exchange were due on February 6, 2023 and February 20, 2023.
These payments, which remained due to holders who were either ineligible for the domestic debt exchange or who opted out of the domestic debt exchange, were made on March 13, 2023.
Enhanced Liquidity
Fitch in its analysis has predicted that the domestic debt exchange will allow Ghana to reduce its interest payments in 2023 by around 10% of expected revenues, or 1.6% of Gross Domestic Product (GDP).
“Gross financing needs this year [2023] have been reduced by 5% of GDP. In 2024, interest payments would be lowered by 6% of revenues, or 0.9% of GDP.”
Fitch Ratings
According to Fitch’s forecast, the domestic debt restructuring together with the suspension of external debt service will significantly reduce Ghana’s cash fiscal deficit in 2023 to 4.5% of GDP in 2023.
Commenting on the Ghana’s solvency state, Fitch disclosed that the Domestic Debt Exchange has increased the debt-to-GDP ratio by 0.6 percentage points with payment-in-kind coupons corresponding to an increase in the face value of the new bonds compared to the face value of tendered bonds.
Despite a substantial redemption re-profiling and significantly lowered interest rates, the present-value of public debt-to-GDP has been reduced by only one percentage points using the standard 5% discount rates that applies in the International Monetary Fund/World Bank debt sustainability framework for low-income countries.
Fitch has further estimated the present value to be slightly above 100% after the completion of the domestic debt exchange.
IMF Bailout To Depend On Government’s Ability To Achieve 55% Of Debt To GDP
More so, according to Fitch, the International Monetary Fund support for Ghana will likely depend on the government’s ability to show a path towards bringing the present value of debt to 55% of Gross Domestic Product.
This, as revealed by the rating agency, will be over the forecast horizon on the basis of the IMF/World Bank debt sustainability analysis, and the ability of official bilateral creditors to provide financing assurances in the context of the Common Framework external debt restructuring that the government of Ghana has requested.
In its comment after upgrading Ghana’s Long-Term (LT) Local-Currency (LC) Issuer Default Rating (IDR), Fitch said it does not expect the provision of financing assurances, which will pave the way for an IMF Board approval of the ECF arrangement and for a new debt sustainability analysis to be published, before end of the second quarter of 2023.
Touching on the current outlook of treasury bills, Fitch noted that despite the materialization of increased confidence on the Local Currency debt market following the completion of the domestic debt restructuring, with yields on 91-day T-bills reaching 18.5% in March 2023 after 35.7% in February 2023, Fitch expects yields on T-bill auctions to remain elevated as inflation remains above 50% year-on-year.
“We do not foresee a resumption in Treasury bonds auctions in the near term. Although the suspension of debt service lowers the current account deficit, which Fitch forecasts at 2.8% of GDP in 2023 after 4.1% in 2022, lack of access to international capital market will continue to weigh on reserves, but more moderately than in 2022.”
Fitch Ratings
