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Fitch downgrades Ghana to CCC credit due to deterioration of public finances

Days after another CCC downgrade from Standard and Poor’s Global Ratings, Ghana has now gotten a second one from the CCC.

According to Fitch Ratings, the downgrade reflects the state of Ghana’s public finances, which has contributed to a protracted lack of access to the eurobond markets and, in turn, caused a considerable decline in external liquidity.

By the end of 2022, foreign reserves will have decreased to less than two months’ worth of current external payments (debits in the current account), according to the report.

The International Monetary Fund has been asked to assist the government of Ghana, which is likely to result in more funding from the Fund and other multilateral lenders.

Fitch noted that although this is not our primary scenario, the government’s high interest expenses and structurally low revenue as a percentage of GDP have increased the chance that IMF help will need some sort of debt management.

“The inclusion of a domestic debt treatment cannot be ruled out” due to the high interest load on local currency debt.

Again, according to Fitch, an agreement with the IMF is probably possible within the next six months.

“We project such a program might disburse up to $3 billion while also releasing budget support from other multilateral lenders. The timing of such a deal, however, is uncertain and would depend on the government’s capacity to produce a credible fiscal reform plan consistent with raising tax revenues and enhancing measures for debt affordability.

Ghana was deemed to be at a high risk of debt distress and vulnerable to shocks from market access and high debt servicing costs in the most current IMF debt sustainability examination, which was completed in 2021.

“We project such a program might disburse up to $3 billion while also releasing budget support from other multilateral lenders. The timing of such a deal, however, is uncertain and would depend on the government’s capacity to produce a credible fiscal reform plan consistent with raising tax revenues and enhancing measures for debt affordability.

Ghana was deemed to be at a high risk of debt distress and vulnerable to shocks from market access and high debt servicing costs in the most current IMF debt sustainability examination, which was completed in 2021.

Fitch expects that Ghana will have to pay $2.75 billion in interest and amortization on its external debt in 2022 and $2.8 billion in 2023 due to a tight timeframe for repayment.

“Access to external funding would remain limited,” the report underlined, “since Ghana is likely to stay barred from Eurobond markets, which had become a regular source of external financing for the government.”

Using a combination of a $750 million term loan from the African Export-Import Bank (BBB), $250 million in syndicated loans from international commercial banks, and up to $200 million from the government’s sinking fund, we anticipate that the government will partially meet its external debt obligations in 2022.

According to the mid-year policy review for 2022, the administration anticipates borrowing the remaining funds from the IMF and other international lenders. The government would have to rely more heavily on its international reserves, which stood at USD7.6 billion as of June 2022, including oil funds and encumbered assets, in the absence of an authorized program by the end of the year, it was further noted.

Ghana was deemed to be at a high risk of debt distress and vulnerable to shocks from market access and high debt servicing costs in the most current IMF debt sustainability examination, which was completed in 2021.

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