African markets

Moody’s downgrades Ghana to Caa1; stable outlook

Moody’s Investors Service (“Moody’s”) today downgraded the long-term issuer and senior unsecured debt ratings of the Government of Ghana to Caa1 from B3 and changed the outlook from negative to stable. Moody’s also downgraded the senior unsecured MTN program ratings to (P)Caa1 from (P)B3 and the senior unsecured debt backed debt rating to B3 from B1.

The downgrade to Caa1 reflects the increasingly difficult task facing the government with its related liquidity and debt issues. Weak revenue generation limits the government’s fiscal flexibility and tight financing conditions in international markets have forced the government to rely on costly debt with shorter maturities. Moody’s estimates that interest payments will eat up more than half of government revenue for the foreseeable future, which is exceptionally high compared to peers at all rating levels. To address this, the government has proposed deep fiscal consolidation and a shift to borrowing from external partners on more favorable terms. However, the strategy comes with significant implementation risks, particularly in a still fragile post-pandemic environment and as international market creditors are pricing in very large risk premia. While Ghana’s external reserves and moderate external debt amortization schedule over the next few years provide the government with a window of opportunity to implement its strategy, pressures on the balance of payments will increase as the significant government funding needs will have to rely on domestic sources.

The stable outlook balances Ghana’s significant fiscal challenges, large refinancing needs and constraints in access to finance against the government’s pre-pandemic track record of implementing relatively effective policies and maintaining a variety funding sources. The institutional framework and the dynamism of the economy of Ghana remain the main supports of credit, with forecasts of economic growth of around 5% in the medium term.

Along with the downgrade, Moody’s also downgraded Ghana’s bond backed by a partial International Development Association guarantee (IDA, Aaa stable) from B3 to B1, reflecting a mixed expected loss now consistent with an increase one notch from the issuer’s rating. .

Finally, Moody’s lowered Ghana’s local currency (LC) and foreign currency (FC) country cap to B1 and B2 respectively from Ba3 and B1. Non-diversifiable risks are appropriately captured in an LC cap three notches above the sovereign rating, taking into account relatively predictable government institutions and actions, low domestic political and geopolitical risk; balanced by a large government footprint in the economy and financial system and current account deficits. The FC country ceiling is kept one notch below the LC country ceiling, reflecting constraints on capital account openness and fiscal policy effectiveness relative to strong foreign exchange reserves and an average efficiency of monetary policy.

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