Moody’s Investors Service has downgraded Ghana’s issuer and senior unsecured rating by one notch to B3 from B2. The outlook on the rating is negative.
The key drivers of Wednesday March 19’s rating action are the following:
1) Deteriorating debt dynamics as reflected by an increasing debt burden due to large fiscal imbalances and a sharp weakening of the country’s national currency, combined with reduced debt affordability stemming from a high cost of funding in the domestic market;
2) increased government liquidity risks, as the government faces large gross borrowing requirements amid more difficult domestic and external funding conditions.
The negative outlook reflects further downside risk to the country’s debt dynamics and liquidity pressure in the short-term if the country’s policies fail to successfully contain its fiscal deficit, stabilize its currency and address current impediments to higher economic growth.
Concurrently, Moody’s has changed the foreign-currency bond ceiling to Ba2 from Ba3 and the foreign currency deposit ceiling to Caa1 from B3.
Moody’s has also changed the local currency bond and deposit country ceilings to Ba3 from Ba2.
RATIONALE FOR DOWNGRADE TO B3
According to the ratings agency, the first driver of the downgrade is Ghana’s deteriorating fiscal strength as reflected in the significant increase in the government debt ratio to an estimated 67.2% of GDP in 2014 from 54.8% in 2013, driven by the large fiscal deficit at 9.4% in 2014, and adverse debt dynamics fueled by high domestic interest rates and currency depreciation against the US dollar.
Limited fiscal and external buffers in the face of tighter US dollar liquidity, economic headwinds and terms of trade shocks increase the risk for these adverse debt dynamics to persist, in Moody’s view.
The main focus under the three-year IMF programme (recently agreed at staff level, pending IMF board approval expected in April) is fiscal consolidation via expenditure control and increased tax collection, building on the budgetary measures implemented in the 2015 budget.
However, this fiscal consolidation effort will take place in the context of a slow growth environment which dampens revenue generation capacity.
Ghana’s debt affordability is already among the weakest in Moody’s rated universe, with annual interest payments amounting to about one third of revenues in 2014.
The growth slowdown is being exacerbated by a significant power shortage currently amounting to almost a third of peak demand. Moody’s expects a more muted fiscal consolidation path over the next two years than envisioned by the government in view of significant investment needs to resolve the power crisis, in addition to the election cycle in 2016 which has historically coincided with expenditure overruns.
The second driver of the downgrade reflects increased government liquidity risk in view of large gross borrowing requirements amid more difficult domestic and external funding conditions.
In particular, higher prevailing risk premiums than in October 2014 during Ghana’s most recent Eurobond issuance add to the challenges of returning to the international markets ahead of the $530 million Eurobond maturing in 2017, notwithstanding the establishment of a Sinking Fund aimed at assisting with future debt repayments.
On the domestic side, large domestic rollover needs and a front-loaded issuance calendar have driven interest rates to over 26% in the short-term T-bill segment.
The IMF programme also reduces the scope for central bank support in financing the current year fiscal deficit.
Moody’s notes that balance of payments risks are partially mitigated by the $940 million IMF programme (equivalent to 2.4% of GDP).
Adverse terms of trade shocks with respect to the country’s main exports, gold and oil, weigh on both the fiscal and external accounts.
According to the revised 2015 budget, lower oil prices will cost the government revenues of about 2 percentage points of GDP.
At the same time, Moody’s expects sufficient foreign direct investment and other capital flows to fund most of the anticipated large current account deficit this year and next.
As a result, the country should be able to maintain foreign exchange reserve coverage of imports at between 2.5 and 3 months on a gross basis during that two-year period, even as net reserves excluding the Bank of Ghana’s FX swaps with resident banks and bridge loans with external counterparties remain low.
RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK
The rationale for keeping a negative outlook is the prospect of worse than expected debt dynamics taking hold if budgetary outcomes are much worse than anticipated and if the exchange rate does not stabilize in the near term, with concomitant pass-through to inflation and high domestic interest rates.
The negative outlook also captures the increased uncertainty generated by the maritime border dispute with Côte d’Ivoire for the development and exploitation of the TEN oil field which the government now expects to come on-stream in the second half of 2016. Coupled with the Sankofa offshore gas project further east that is scheduled to commence production in 2017, increased oil and gas production should otherwise ease the downward pressures on the country’s foreign exchange buffers and support medium-term growth prospects.
WHAT COULD CHANGE THE RATING UP/DOWN
Downward pressure on the rating could arise from factors that include
(1) continued delays in fiscal consolidation or in the resolution of the power crisis;
(2) a sustained decline in oil or gold prices that would put further downward pressure on fiscal revenues and export receipts;
(3) sustained loss of market access; (4) continued pressure on the balance of payments and on international reserves.
A return to a stable outlook on Ghana’s sovereign rating could develop as a result of:
(1) accelerated and sustained fiscal consolidation that would stabilize the government’s debt burden, supporting a gradual reduction over the medium term;
(2) a strengthening of FDI inflows as a source of funding for the country’s large power and infrastructure investment needs;
(3) a bolstering of Ghana’s foreign-exchange and/or fiscal reserves that would reduce the country’s vulnerability to domestic or external shocks.