Moody’s downgrades Ghana to further junk status

The long-term issuer ratings of the Government of Ghana have been lowered by Moody’s from Caa2 or further junk status to Ca, with a stable outlook.

The downgrade review, which began on September 30, 2022, has now been completed.

“The Ca rating reflects Moody’s expectation that private creditors will likely incur substantial losses in the restructuring of both local and foreign currencies debts planned by the government as part of its 2023 budget proposal to Parliament on November 24 2022,” the rating agency said in a statement posted online.

“Given Ghana’s high government debt burden and the debt structure, it is likely there will be substantial losses on both categories of debt in order for the government to improve debt sustainability meaningfully,” the statement warned.

Further, it was clarified that Moody’s assumption that the debt restructuring will take place in concert with creditors and under the aegis of a funding programme with the IMF is balanced by the possibility of a less orderly form of default that could result in higher losses for private-sector creditors, hence the stable outlook.

Moody’s also announced that it had lowered its rating on Ghana’s senior unsecured debt from Caa2 to Ca, as well as its rating on the country’s old unsecured MTN programme from (P)Caa2 to (P)Ca, and its rating on Ghana’s bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) from Caa1 to Caa3. The last number shows a consolidated loss forecast in line with a one-notch upgrade in the issuer’s creditworthiness.

Finally, it was emphasised that “Moody’s has downgraded Ghana’s local currency (LC) and foreign currency (FC) country ceilings to respectively Caa1 and Caa2, mirroring the downgrading of the sovereign ratings by two notches.”

“Non-diversifiable risks are captured in an LC ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and government actions, limited domestic political risk, and low geopolitical risk, balanced against a large government footprint in the economy and the financial system and external imbalances. The FC country ceiling one notch below the LC country ceiling reflects constraints on capital account openness and weak policy effectiveness against authorities’ history of providing access to foreign exchange”, it added.

Moody’s believes that private creditors will suffer heavy losses due to the government’s plan to restructure local and foreign currency loans revealed on November 24, 2022, as part of the government’s budget proposal for 2023.

For over a year, the government has struggled to keep up with the rising cost of debt while seeing its policy options stemming the tide of rising prices, higher interest rates, a weakening currency, and higher debt dwindling.

Debt restructuring has thus become increasingly apparent as a need for ensuring debt sustainability. More importantly, Moody’s believes that substantial losses to creditors as part of the debt exchange are likely given the structure of government debt, which is evenly split between foreign and local currency, its elevated level (forecast at 104% of GDP by the end of this year), and its cost (interest payments should consume 58% of revenue in 2022).

Moody’s assumption of a smooth debt restructuring with creditors under the auspices of an IMF funding package is the primary factor behind the stable outlook.

Ghana’s economy and institutional framework help to limit the likelihood of bigger losses for private-sector creditors than are currently estimated by Moody’s.

Given its significant vulnerability to social hazards, Ghana’s ESG Credit Impact Score is highly negative (CIS-5). As a result of low wealth and extremely high debt levels, resilience to environmental and social threats is relatively low.

Environmental concerns represent a moderate threat to Ghana’s credit profile (E-3 issuer profile score). The cocoa industry significantly impacts GDP, exports, and employment. Still, its high water requirements put the country at risk of climate change and, more specifically, drought. The magnitude of the agriculture industry inherently leaves the economy vulnerable to climate change and other weather-related disruptions. Because some parts of Ghana do not have easy access to clean water, the country faces concerns about water management.

Because of severe shortages in affordable housing and educational opportunities in rural areas, the social risk exposure is relatively high (S-4 issuer profile score). The risks are mixed when it comes to health and safety and access to essential services. While the government has taken steps to reduce poverty and inequality and build social safety nets, the fact that more than half of government revenue is consumed by interest payments limits the government’s ability to a real reduction in social risks.

In terms of governance, the G-5 issuer profile score is quite alarming. Institutionally, Ghana has fared reasonably well, yet, the country’s relatively low debt affordability is a direct result of difficulties in domestic income mobilisation and major limits on the effectiveness of the fiscal policy.

It will take time for the authorities revenue and competitiveness-related institutional reforms to bear fruit.

It is an indication of institutional weakness on the part of the government to consider a debt restructuring—which is viewed as a default by Moody’s—to increase the long-term viability of its debt. Today’s grading action was influenced in part by governance-related factors.

This credit rating action was delayed from its initially scheduled release date in the sovereign release calendar published on www.moodys.com due to the increased default risk connected with Ghana’s declaration of a strategy to restructure debt. Furthermore, the ratings being under evaluation for a downgrade necessitated a shift in the date at which the sovereign release calendar would generally be updated.