The International Credit Ratings Agency, Fitch Ratings has assigned Ghana’s proposed foreign currency bonds a ‘B’ rating. The rating is in accordance with Ghana’s Long Term Foreign Currency Issuer Default Rating (IDR), Fitch says.

In October last year, Fitch also assigned Ghana’s Long Term Foreign and Local-Currency IDRs at ‘B’ with a stable outlook.

Concerning long term foreign and local currency IDRs, a ‘B’ rating indicates the presence of a default risk, but a limited space of safety is available. This means that financial commitments are being met; but, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

Ghana’s B rating for IDRs in 2020 reflected increased spending towards Covid-19 as well as the 2020 elections. Then, the expectation of a bounce back in economic activity as a result of the ease in restrictions indicated a gradual revival of the business and economic environment, albeit, not robust.

Fitch has since then, not changed Ghana’s Long Term Foreign Currency IDR. Nonetheless, the Ratings Firm has indicated that the bond’s rating is still sensitive to changes in the IDRs.

This is against the backdrop that, Ghana, having outlined its medium-to-long term fiscal consolidation in its 2021 budget holds promise for macroeconomic stability. However, the trajectory of fiscal consolidation still remains slow. Fitch has warned that a slow fiscal consolidation path could add to ratings strains.

“The gradual pace of projected consolidation will mean Ghana’s ability to absorb any new shocks will remain weak for an extended period. Any such shocks would increase the likelihood of government debt remaining on an upward trajectory beyond 2022.”

Factors to consider in IDR rating

Furthermore, the extent of government’s public finances plays a critical role in determining an upgrade or downgrade. Thus, greater confidence in Ghana’s ability to draw down public debt-to-GDP sustainably is a major determinant. For instance, through actions such as implementing a credible fiscal consolidation strategy.

Ghana’s fiscal consolidation path outlined in the 2021 budget is inundated with risks of fiscal slippages including inter alia government’s cost of public debt burden, high interest costs and risks with revenue forecasts. Although, these are supported by a stronger GDP growth projection of 5% compared with that of 2020.

“The high cost of the government’s debt burden is an important rating weakness. And will continue to squeeze the government’s other spending priorities. According to the government, interest costs were equivalent to 6.4% of GDP in 2020, or 45% of total fiscal revenue. The large increase in debt in 2020 means that interest costs will increase in 2021.”

Further Analysis on Ghana’s Rating

Fitch alludes to significant risks in public finances, indicating that they may fall short of the goals outlined in the budget. Aside this, Fitch forecasts Ghana’s interest spending to go beyond 50% of revenue in 2021. Yet above the median of 11% for ‘B’ rated sovereigns.

Furthermore, the state of the country’s external finances also plays a role. Fitch indicates that an improvement in Ghana’s external liquidity, such as increase in international reserves, apart from non-debt creating flows may improve Ghana’s ratings.

However, Ghana has indicated raising funds to the tune of USD 5billion from the International Capital Market to support its short term external liquidity position. This however, has the tendency of compounding the country’s debt burden.

Fitch Ratings’ affirmation of Ghana’s proposed USD bonds ‘B’ rating may not wholly affect Ghana’s ability to raise the planned $5 billion from the International market. But, there is the likelihood of investors undersubscribing the bond due to risks involved.