Moody’s affirms Ghana’s B3 ratings

Moody’s has affirmed the B3 long-term issuer ratings of the Government of Ghana. The outlook remains negative.

President Akufo-Addo and Ghana's Finance Minister, Ken Ofori Atta

Moody’s has concurrently affirmed the B3 foreign currency senior unsecured debt ratings, the (P)B3 senior unsecured MTN programme rating and the B1 rating of the bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable).

The B3 rating and negative outlook reflect Ghana’s high debt burden that is unlikely to fall rapidly, continued weak debt affordability, high gross borrowing requirements and ongoing liquidity challenges in the face of downside economic, social and financial risks in the aftermath of the coronavirus pandemic.

The rating affirmation also takes into account improving growth prospects, resilient external sector performance and Ghana’s continued access to domestic and international capital markets, supported by the government’s structural economic reform agenda to improve export competitiveness and broaden the revenue base.

Ghana’s local currency (LC) country ceiling remains unchanged at Ba3 and the foreign currency (FC) country ceiling unchanged at B1. Moody’s assessment is that non-diversifiable risks are appropriately captured in a LC ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and government actions, low domestic political, and geopolitical risk; balanced against a large government footprint in the economy and the financial system, external imbalances, and reliance on revenue from commodities that can lead to country-wide stress. The FC country ceiling is maintained one notch below the LC country ceiling, reflecting existing constraints on capital account openness, balanced against moderate fiscal and monetary policy effectiveness.

WEAK DEBT AFFORDABILITY AND LARGE GROSS FINANCING NEEDS DRIVE EXPOSURE TO DOMESTIC AND EXTERNAL FUNDING SHOCKS

Ghana’s credit profile is characterized by large gross borrowing requirements that exceed 20% of GDP, as well as persistent weak debt affordability stemming from interest payments rising to over 40% of revenue—both of which are among the weakest of sovereigns rated by Moody’s, underpinning its exposure to potential funding shocks.

Both long-standing credit characteristics are the result of a high debt burden financed at relatively high costs and relatively short maturities. These vulnerabilities have been exacerbated by the pandemic. The fiscal deficit widened to 13.9% of GDP in 2020 (inclusive of costs associated with the financial sector clean-up and “take or pay” energy contracts), pushing the debt burden beyond 80% of GDP, from 62.6% in 2019.

While the government’s most recent budget sets out a plan of fiscal consolidation to reduce the fiscal deficit to 4.8% of GDP by 2024, the longer-term economic and social scarring from the coronavirus shock presents significant challenges to achieving such ambitious targets. Moody’s assumes that the pace of consolidation will be slower, leaving the debt burden above 80% of GDP for the foreseeable future.

In the meantime, Ghana will increasingly rely on domestic and international bond issuance to meet deficit financing requirements and eurobond maturities starting 2023 and rising to $1 billion per year 2025-2027, leaving the sovereign exposed to a potential unfavorable turn in investor confidence.

ROBUST GROWTH RECOVERY AND STABLE EXTERNAL POSITION SUPPORT CREDITWORTHINESS

Downside risks notwithstanding, Ghana’s credit profile benefits from strong economic growth potential. Moody’s expects GDP growth to rise towards 6% in 2022 and stay around these rates in the medium term — in the absence of new shocks.

Meanwhile, Ghana’s external position which has been a credit weakness in the past, has remained relatively stable through the pandemic, denoting greater resilience. The current account deficit was stable last year, at 2.6% of GDP; assuming steady commodity prices, Moody’s expects the deficit to remain relatively narrow around 3% of GDP. Foreign exchange reserves, at four months of imports cover, have been bolstered by the recent eurobond issuance and gold and cocoa production that continues to perform well. Coupled with the ramping up of oil and gas production from the Pecan field, export prospects remain favorable.

Ghana also has a track record of political stability and relatively sound institutional and governance frameworks compared to peers, most recently demonstrated in the peaceful elections in late 2020 and continued implementation of the economic reform agenda to improve export competitiveness and broaden the revenue base.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Ghana’s ESG Credit Impact Score is highly negative (CIS-4), reflecting its high exposure to social risks. Resilience to environmental and social risks is weak, constrained by low wealth and high debt levels.

Ghana’s credit profile is moderately exposed to environmental risks and is reflected in its E-3 issuer profile score. The cocoa sector is a large contributor to GDP and to exports and remains an important source of employment. Ghana is exposed to water management risks stemming from a lack of access to potable water in some areas. The weight of the agricultural sector exposes the economy to weather-related disruptions and the effects of climate change.

The exposure to social risk is high (S-4 issuer profile score), driven by limited access to quality housing and education, especially in rural areas. Risks related to health and safety and access to basic services are moderately negative. In general, the government’s measures aimed at reducing poverty and inequality and continuing to strengthen social safety nets somewhat mitigate but do not fully offset social risks.

Governance is moderate with a G-3 issuer profile score. Overall, Ghana performs better than many other Sub Saharan African peers, albeit the score partly reflects the slow domestic revenue mobilisation challenges facing the authorities. The authorities have undertaken some institutional reforms on the revenue and competitiveness front, which will take some time to produce results.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, an upgrade is unlikely in the near term. The outlook could be returned to stable were Moody’s to conclude that the fiscal consolidation plan would arrest, and eventually lead to a markedly downward trajectory in, the debt burden over time. In addition, an effective domestic revenue mobilisation plan that bolsters debt affordability, creating more fiscal room for maneuvre, and lowers government liquidity risks would likely lead to a higher rating.

Moody’s would downgrade the rating if it were to conclude that liquidity pressures over a prolonged period were likely to create significant fiscal challenges. Moreover, increasing evidence that Ghana will be unlikely to be able to raise revenue and contain expenditure resulting from slow fiscal consolidation, evidenced by a rise in its fiscal deficit and debt would also likely lead to a downgrade.

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