Moody’s Ratings has upgraded Ghana’s long term local and foreign currency issuer ratings to Caa2 from Caa3 and Ca and changed the outlook to positive from stable.
In a rating note, Moody’s stated that the main driver of the upgrade to Caa2 is Ghana’s extensive debt treatment that has provided meaningful relief to the government’s finances.
“Since seeking relief through the G20 common framework for debt treatment in 2022, the government of Ghana restructured local currency debt and debt owed to bilateral official-sector creditors and concluded the exchange of Eurobonds on 9 October rating”, the rating note said.
Debt restructuring along with the debt service moratorium imposed during the negotiation period, has reduced the government debt burden from a peak of 93% of GDP in 2022 to an expected 81% in 2024, Moody’s explained.
It however added that going forward, the resumption of debt service payments, fiscal risks in the run-up to the December elections, potential negative pressure on the currency as well as reliance on expensive short-term debt represent still-elevated liquidity risk, constraining the rating.
The positive outlook reflects the potential for liquidity risk to ease amid ongoing fiscal consolidation efforts supported by an IMF programme, Moody’s said.
Analysts stated that should the risk factors mentioned above dissipate, Ghana’s rating could migrate to a higher level. Although Ghana’s institutional credibility has weakened due to financial difficulties, the country’s remaining institutional capacity offers potential for a relatively quick reversal in the credit trend. Moreover the programme with the IMF should help strengthen policy credibility and foster Ghana’s access to low-cost funding from official-sector sources.
“We have concurrently upgraded Ghana’s local and foreign currency senior unsecured MTN program ratings to (P)Caa2 from respectively (P)Caa3 and (P)Ca, as well as assigning a Caa2 rating to the senior unsecured instruments issued as part of the debt exchanged on 9 October.
“No action was taken on outstanding debt instruments; we expect to withdraw those ratings when the obligations are no longer outstanding”, the rating note explained.
Concomitantly, Moody’s analysts said they have revised up by one notch Ghana’s local currency (LC) and foreign currency (FC) country ceilings to respectively B2 and B3, from B3 and Caa1, mirroring the upgrade of the sovereign local currency ratings by one notch.
Non-diversifiable risks are captured in a 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.
Meanwhile, the FC country ceiling one notch below the LC country ceiling reflects the authorities’ history of providing access to foreign exchange, notwithstanding constraints on capital account openness and weak policy effectiveness.
Moody’s said Ghana’s comprehensive debt restructuring provided meaningful relief to the government’s financial burden, being the primary reason for upgrading its ratings. Ghana’s debt treatment, initiated in December 2022 under the Common Framework, has covered 55% of the total debt outstanding at that time, it said, adding that a 37% haircut on principal was applied to most Eurobonds, representing 20% of total debt.
The rating agency said the remainder, composed of local currency debt (excluding Treasury Bills) and debt owed to bilateral official-sector creditors, was restructured earlier through a combination of lengthening of maturities and lowering of coupon rates.
To support financial stability, the government used a Financial Stability Fund to support domestic financial institutions participating in the exchange, Moody’s wrote.
Analysts said debt restructuring, along with the debt service moratorium imposed during the negotiation period, has reduced government debt to an expected 81% of GDP in 2024 from 87% in 2023 and 93% in 2022.
“We expect government debt will continue to decline, albeit at a more gradual pace as the government resumes paying interest and principal on all its debts.”
Moreover, foreign exchange risk remains significant with close to half of the government debt denominated in foreign currency. A key tenet of the fiscal outlook is the extent to which the government can maintain its fiscal consolidation efforts, ultimately supporting its access to funding.
Moody’s said given the elections planned for December 2024, the risk of fiscal arrears accumulating remains present. “Assuming that there are no significant arrears, we forecast a balanced primary budget in 2024 and return to a primary surplus in 2025 close to the primary surplus of 1.3% of GDP achieved in 2023”, the rating note said.
The government’s main borrowing source remains the issuance of Treasury Bills at rates roughly in line with the central bank’s policy rate of 27%, well-above the inflation rate of 21%. As a result, liquidity risk remains elevated, constraining the rating.
In addition, Moody’s said the positive outlook reflects the potential for liquidity risk to ease amid ongoing fiscal consolidation efforts supported by an IMF programme.
Fiscal risks in the run-up to the December elections, the resumption of debt service payments as well as the reliance on expensive short-term debt and downward pressure one the currency represent still-elevated risk; were these risks to dissipate, Ghana’s rating could migrate to a higher level.
It is noted that gradual disinflation and fiscal improvements raise the prospect of a normalization in interest rates for local currency debt, the main source of borrowing for the government, which would temper Ghana’s debt affordability challenge and ease liquidity risks.
In addition, official-sector funding could strengthen amid Ghana’s IMF programme, which combined with robust gold exports recently, contributes to the prospect of a relatively stable currency, the rating note stated.
Moody’s said although Ghana’s institutional credibility has weakened through the recent default, the country’s institutional capacity offers potential for a relatively quick reversal in the credit trend. Notwithstanding the challenge brought by the economic crisis and debt restructuring, the quality of the country’s institutions still exceeds that of most of its rated peers, the rating agency added.
Analysts said the comparatively swift and transparent handling of the debt restructuring lends credibility to the authorities. Fiscal data for 2024 so far show that revenue and spending have performed better than in the years preceding the debt restructuring.
More broadly, Ghana’s ranking under the Worldwide Governance Indicators for policy effectiveness, the rule of law and the control of corruption remains relatively strong.
Moody’s said the programme with the IMF should help strengthen policy credibility and foster Ghana’s access to low-cost funding from official-sector sources, alleviating liquidity risks constraining the rating.
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