Domestic Debt Exchange Completed: The upgrade of the ratings on Ghana's LC denominated debt follows the completion, effective 21 February 2023, of the domestic debt exchange programme by the Republic of Ghana. Fitch viewed this transaction as a distressed debt exchange in a context of heightened fiscal pressures, with interest costs amounting to 54% of revenues in 1H22, and lack of access to international capital markets.
Payments on LC Bonds Resumed: Two principal payments on bonds issued prior to the domestic debt exchange were due on 6 February 2023 and 20 February 2023. These payments, which remained due to holders who were either ineligible for the domestic debt exchange or who opted out of the domestic debt exchange, were made on 13 March 2023. The upgrade of Ghana's LTLC IDR follows this resumption in payments on LC bonds that cures the default on LC debt.
Enhanced Liquidity: Fitch estimates that the domestic debt exchange allows Ghana to reduce its interest payments in 2023 by around 10% of expected revenues, or 1.6% of GDP. Gross financing needs this year have been reduced by 5% of 2023 GDP. In 2024, interest payments would be lowered by 6% of revenues, or 0.9% of GDP. According to Fitch's forecasts, the domestic debt restructuring together with the suspension of external debt service, significantly reduces Ghana's cash fiscal deficit in 2023 to 4.5% of GDP in 2023.
Solvency Concerns Remain Critical: The domestic debt exchange has increased the debt-to-GDP ratio by 0.6pp with payment-in-kind coupons corresponding to an increase in the face value of the new bonds compared to the face value of tendered bonds. Despite a substantial redemption reprofiling and significantly lowered interest rates, the present-value of public debt-to-GDP has been reduced by only 1pp using the standard 5% discount rates that applies in the IMF/World Bank debt sustainability framework for low-income countries. Fitch estimates the present value to be slightly above 100% after the completion of the domestic debt exchange.
IMF support for Ghana will likely depend on the government's ability to show a path towards bringing the present value of debt to 55% of GDP over the forecast horizon on the basis of the IMF/World Bank debt sustainability analysis and the ability of official bilateral creditors to provide financing assurances in the context of the Common Framework external debt restructuring that authorities have requested. Fitch does not expect the provision of financing assurances, which will pave the way for an IMF Board approval of the ECF arrangement and for a new debt sustainability analysis to be published, before end of 2Q23.
Financing Still Constrained: Despite the materialisation of increased confidence on the LC debt market following the completion of the domestic debt restructuring, with yields on 91-day T-bills reaching 18.5% in March 2023 after 35.7% in February 2023, Fitch expects yields on T-bill auctions to remain elevated as inflation remains above 50% yoy. We do not foresee a resumption in T-bonds auctions in the near term. Although the suspension of debt service lowers the current account deficit, which Fitch forecasts at 2.8% of GDP in 2023 after 4.1% in 2022, lack of access to international capital market will continue to weigh on reserves, but more moderately than in 2022.
Foreign-Currency Debt Not Affected: Fitch downgraded the LTFC IDR to 'RD' from 'C' on 21 February 2023 following the expiration of the grace period for a missed Eurobond coupon payment. This missed payment was consistent with the partial suspension on external debt payments announced by the government in December 2022. Ghana subsequently asked official creditors for a restructuring of its external debt under the G20 Common Framework.
Partially Guaranteed Notes Not Affected: Fitch downgraded the issue rating on Ghana's US dollar-denominated notes due October 2030 to 'CC' from 'B-' on 21 December 2022. The notes benefit from a partial credit guarantee backed by the International Development Association (IDA) for scheduled debt service payments up to 40% of the original principal, or USD400 million, representing 3.5 years of full interest payments. The notes are part of the current external debt moratorium and at least the non-guaranteed part is likely to be included in the external debt restructuring. However, the IDA guarantee provides additional liquidity for debt service over the next 3.5 years, and could lead to higher recoveries.
ESG - Governance: Ghana has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Ghana has a medium WBGI ranking at 50.8 reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
ESG - Creditor Rights: Ghana has an ESG Relevance Score (RS) of '5' for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The rating on Ghana's LTFC IDR reflects Fitch's view that Ghana is in default.
RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Renewed deterioration in the credit profile due to weaker economic performance or significant delays in the external debt restructuring process, which would signal that further restructuring of LC debt might be needed.
-The partially guaranteed notes could be downgraded depending on the evolution of the debt restructuring.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Once Ghana reaches an agreement with private creditors on the restructuring of its FC-denominated debt and completes that restructuring process following the Common Framework official creditors' claims treatment, Fitch will assign a LTFC IDR based on a forward-looking assessment of Ghana's willingness and capacity to honour its FC debt, and may reassess the LTLC IDR in that context.
-Evidence that the partially-guaranteed notes will be excluded from the external debt restructuring could lead to an upgrade of their issue rating.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Ghana a score equivalent to a rating of 'CCC+' on the Long-Term Foreign-Currency IDR scale. However, in accordance with its rating criteria, Fitch's sovereign rating committee has not utilised the SRM and QO to explain the ratings in this instance. Ratings of 'CCC+' and below are instead guided by the rating definitions.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Ghana has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Ghana has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Ghana has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Ghana has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.
Ghana has an ESG Relevance Score of '5' for Creditor Rights, as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The default on the foreign-currency denominated debt reflected in the 'RD' LT FC IDR has a negative impact on the credit profile.
Ghana has an ESG Relevance Score of '4[+]'for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Ghana has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.