Moody’s downgrades Ghana to further junk status, warns investors could lose in debt restructuring

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

The review for downgrade that was started on September 30, 2022, comes to an end now.

According to a statement on Moody’s website, “The Ca rating reflects Moody’s expectation that private creditors will likely suffer significant losses in the restructuring of both local and foreign currency debts planned by the government as part of its 2023 budget proposal to Parliament on November 24, 2022.”

In order for the government to significantly improve debt sustainability, it is expected that there will be significant losses on both kinds of debt given Ghana’s high government debt burden and debt structure.

It went on to say that the stable outlook strikes a balance between Moody’s presumption that the debt restructuring will take place in consultation with creditors and under the auspices of a funding program with the IMF, and the possibility of a less orderly form of default that could result in greater losses for private-sector creditors.

Additionally, Moody’s announced that it had completed the concurrent reviews for downgrading by lowering the ratings of Ghana’s senior unsecured debt to Ca from Caa2 and the senior unsecured MTN program to (P)Ca from (P)Caa2, as well as lowering the rating of Ghana’s bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) to Caa3 from Caa1. The latter shows a combined projected loss consistent with an increase in issuer rating of one notch.

Last but not least, Moody’s has downgraded Ghana’s local currency (LC) and foreign currency (FC) national ceilings to B2 and B3, respectively, echoing the two notch reduction of the sovereign ratings, it was emphasized.

Non-diversifiable risks are taken into account in an LC ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and governmental actions, limited domestic political risk, and low geopolitical risk; balanced against a significant government presence in the financial system, the economy, and the world economy, as well as external imbalances. According to the government’s history of granting access to foreign exchange, the FC country ceiling, which is one notch below the LC country ceiling, “reflect[s] limits on capital account openness and very limited policy effectiveness”.

Ratings rationale

A considerable loss for private creditors is anticipated as a result of the restructuring of domestic and foreign currency loans that the government announced on November 24, 2022 as part of its budget proposal for 2023.

Since the government has been struggling with mounting and expensive debt for more than a year, there are less and fewer policy levers available to stop the downward spiral of rising debt, weakening local currency, high inflation and high interest rates.

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

Rationale for stable outlook

The stable outlook is mostly a result of Moody’s assumption that the debt restructuring will take place with creditors in a planned and organized way under the auspices of an IMF funding package.

With the help of Ghana’s economy and institutional structure, the possibility of private-sector creditors suffering greater losses than those currently anticipated by Moody’s is largely kept under check.

Environmental, Social, Governance considerations

Ghana’s ESG Credit Impact Score is extremely low (CIS-5), which reflects the country’s considerable social risk exposure. Because of the low wealth and high debt levels, resilience to environmental and social threats is quite low.

According to the report, Ghana’s credit profile is moderately exposed to environmental risks (E-3 issuer profile score), and because the cocoa industry uses a lot of water and contributes significantly to the nation’s GDP, exports, and employment, it exposes the nation to climate change in general and droughts in particular. In general, the economy is more vulnerable to weather-related problems and the effects of climate change because of the magnitude of the agricultural sector.

Due to some areas’ lack of access to potable water, Ghana is also susceptible to water management hazards.

“The lack of access to high-quality housing and education, particularly in rural areas, is what causes the exposure to social risk to be severely unfavorable (S-4 issuer profile score). Access to basic amenities, as well as health and safety risks, are all somewhat unfavorable. Although the government has implemented policies to combat poverty and inequality and expand social safety nets, its financial difficulties limit its ability to significantly reduce social risks given that more than half of government revenue is used to pay interest, it continued.

Governance is very highly negative with a G-5 issuer profile score, it pointed out, adding, overall, Ghana’s institutions have shown some effectiveness, however domestic revenue mobilisation challenges and significant constraints on fiscal policy effectiveness manifest in very weak debt affordability. The authorities have undertaken some institutional reforms on the revenue and competitiveness front, which will invariably take time to produce results.

It said that the government’s intention to use a debt restructure, which is considered a default by Moody’s, in order to increase its sustainability ultimately reveals institutional weakness. The rating decision made today is influenced by governance factors.

This credit rating action was released on a date other than the one listed in the sovereign release calendar on due to the increased default risk brought on by Ghana’s announcement of a plan to restructure debt. Additionally, the conclusion of the review had to change from the previously planned date in the calendar for sovereign release because the ratings had been under review for downgrade.

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