Another downgrade: Fitch in its latest rating has downgraded Ghana from 'B-' to 'CCC'

The rating company Fitch has lowered Ghana’s Issuer Default Rating (IDR) for Long-Term Foreign-Currency (LTFC) from “B-” to “CCC.”

According to the statement, the downgrade reflects the state of Ghana’s public finances, which have made it difficult for the country to access the Eurobond markets for an extended period of time and therefore caused a considerable drop in external liquidity.

“In the absence of new external financing sources, international reserves will fall close to two months of current external payments (debits in the current account) by end-2022”, it explained.

Fitch also mentioned that; “the government’s high-interest costs and structurally low revenue as a percentage of Gross Domestic Product have increased the likelihood that IMF support would necessitate some form of debt treatment, although this is not our main scenario. The high-interest burden on local-currency debt also means that the inclusion of a domestic debt treatment cannot be ruled out”.

IMF bailout may arrive in six months time

Again, Fitch believes that a deal with the IMF is likely within the next six months.

“We estimate that a programme could disburse as much as $3 billion and unlock budget support from other multilateral lenders. However, the timing of such a deal is uncertain and would be dependent on the government’s ability to present a credible fiscal reform plan in line with increasing government revenue and improving debt affordability metrics”.

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.

“Access to external financing will remain tight, as Ghana is likely to remain locked out of Eurobond markets, which had come to be a regular source of external financing for the government”, it stressed.

“In 2022, we expect that the government will meet its external debt obligations, in part, through 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. The 2022 mid-year policy review indicates that the government expects to source the rest from the IMF and other multilateral lenders. In the absence of an approved programme by the end of the year, the government would have to draw more heavily on its international reserves, which were USD7.6 billion, including oil funds and encumbered assets, as of June 2022”, it pointed out.

Fiscal consolidation pace

According to Fitch, efforts to consolidate the government’s finances would continue to be hampered by its high interest expenses and little revenue.

The medium-term fiscal plan included in the 2022 Budget called for the deficit to be reduced to 5% of GDP or less by 2024. Due to new levies, including one on electronic transactions, and an enormous rise in domestic revenue, the anticipated consolidation was based on the expiration of pandemic-related expenditure items.

According to the rating agency, delays in putting the new tax measures into action have led to lesser revenue and a higher nominal deficit in the first half of 2022 compared to projections from the budget.

However, due to an increase in nominal GDP, the updated fiscal deficit prediction for 2022, which was released in July and was previously predicted to be 7.4% of GDP, is now 6.6% of GDP.

“We forecast the 2022 fiscal deficit at 8.1% of GDP; this is inclusive of energy-sector clean-up costs not contained in the government’s figure. The possibility of new revenue measures could lead to a further shrinkage of deficit in 2023, but the government’s slim majority in parliament could frustrate attempts to raise tax rates or implement new taxes”, Fitch mentioned.

Fitch conlcluded that; “The government has increased its outstanding advances with the BoG, providing some additional domestic financing and could conduct another private debt placement with the central bank as it did in 2020, but such a measure would necessitate parliamentary approval.”