Fitch Ratings, a global credit rating agency, has recently issued a warning about prolonged debt resolution in frontier markets, with a particular focus on Ghana, stating that defaults are taking longer to resolve than in previous years.
Frontier markets have long been an attractive option for investors seeking higher returns and diversification. These markets, often characterized by emerging economies with significant growth potential, have, in recent years, faced increased scrutiny due to mounting debt levels.
Frontier markets are typically countries with economies that are in the early stages of development, making them riskier investments compared to more established emerging or developed markets. These markets have often borrowed money to finance infrastructure projects, spur economic growth, and meet fiscal deficits. However, these borrowings come with risks, as seen in the case of Ghana.
According to the UK-based firm, the median duration of Fitch-rated sovereign defaults has stretched to 107 days since 2020, compared to 35 days for all defaults since 2000.
Fitch attributes the delays in resolving debt issues to the ineffectiveness of the Common Framework (CF), designed to facilitate creditor coordination, over the past two years.
The agency noted that despite most frontier markets being on Stable or Positive Outlook, they are generally in a weaker position than a few years ago.
Half of all Fitch-rated frontier markets are currently rated ‘B-’ or less, with record-level defaults affecting five sovereigns rated ‘RD’: Zambia, Ghana, Sri Lanka, Belarus, and Lebanon.
The agency highlighted weak coordination among Chinese stakeholders as a key factor in the prolonged resolution, emphasizing China’s demand for multilateral debt inclusion in restructuring without any haircuts, only maturity reprofiling.
Ghana’s Debt Woes
Ghana, a prominent frontier market in Africa, has faced mounting debt challenges. The country’s debt-to-GDP ratio has surged in recent years, reaching levels that have raised concerns among investors and credit rating agencies.
Ghana’s high debt levels, exacerbated by the economic impact of the COVID-19 pandemic, could lead to a prolonged period of debt resolution. This is a significant concern for the country’s economic stability and its ability to attract investment.
The warning from Fitch Ratings highlights the complexity of debt resolution in frontier markets like Ghana. Several challenges make this process particularly intricate. Firstly, frontier markets often have limited access to international capital markets. This can hinder their ability to refinance or restructure debt on favorable terms.
Moreover, currency volatility is a significant risk in frontier markets, making it challenging to service foreign currency-denominated debt when local currencies depreciate.
While political instability and governance issues can complicate debt resolution efforts, frontier markets may struggle to implement necessary reforms to manage their debt effectively. Also, negative market sentiment can exacerbate debt problems, as it can lead to higher borrowing costs and reduced investor confidence.
Implications for Investors and Economies
Fitch’s warning should serve as a wake-up call for both investors and policymakers. For investors, it underscores the importance of conducting thorough due diligence and risk assessment before investing in frontier markets. Higher yields can be attractive, but they come with higher risks, especially in economies with mounting debt burdens.
For the countries themselves, this warning highlights the urgency of implementing sound fiscal and monetary policies. Reducing debt levels and improving transparency and governance are critical steps in addressing the debt issue and regaining investor trust.
The warning Issued by Fitch Ratings regarding prolonged debt resolution in frontier markets, including Ghana, underscores the challenges faced by these economies in managing their debt. The situation in Ghana is a stark reminder of the risks associated with investing in frontier markets, and it calls for a more cautious approach from investors.
For frontier market governments, it emphasizes the need for prudent fiscal management and a commitment to implementing reforms to alleviate the debt burden. Ultimately, the path to resolving these debt issues will require concerted efforts from all stakeholders especially the Nana Addo-led government to ensure the long-term stability and growth of these markets.
