The downgrade reflects the increased likelihood that Ghana will pursue a debt restructuring given mounting financing stress, with surging interest costs on domestic debt and a prolonged lack of access to Eurobond markets. There is a high likelihood that the IMF support programme currently being negotiated will require some form of debt treatment due to the climbing interest costs and structurally low revenue as a percentage of GDP.
Fitch said: “We believe this will be in the form of a debt exchange and will qualify as a distressed debt exchange under our criteria. The government has not confirmed or denied press reports that Ghana is preparing to negotiate a restructuring. Interest costs on external debt are lower than for domestic debt and near-term external debt amortisations appear manageable. However, we believe there could be an incentive to spread a debt restructuring burden across domestic and external creditors and therefore do not have a strong basis to differentiate between Foreign- and Local-Currency ratings at this time.”
High Debt Service, Financing Constrained
Interest costs reached 47.5% of revenue in 2021 and 54% in 1H22. Interest payments on domestic debt comprise around 75% of total interest costs. This reflects high yields on domestic debt, which have climbed following a 34% yoy spike in inflation as at August 2022 and monetary tightening, with the Bank of Ghana hiking its policy rate to 22.0%, from 14.5% in February. Yields on the 91-day treasury bill reached 27.0% in August, up from 12.5% in August 2021, and 10-year yields have spiked to above 35% in September, from around 20% in 1Q22.
Limited Access to External Financing
The rating agency observed that access to external financing environment would still be closed to the West African nation until the country finally ties down IMF programme.
“We expect external financing access to stay limited until at least an IMF programme is agreed, as Ghana is likely to remain locked out of Eurobond markets, which had been the country’s regular source of external financing. The government obtained a USD750 million term loan from African Export-Import Bank (BBB/Stable this year and USD250 million in syndicated loans from global commercial banks. It can also use its sinking fund. We estimate Ghana faces around USD3 billion of external debt service costs in 2023, including amortisation and interest.”
Continued Reserve Pressure
It continued:”We expect persistent downward reserve pressure in the absence of an IMF programme. Official reserve assets fell to USD7.3 billion in June, from USD9.8 billion in 2021 and gross international reserves, excluding oil funds and encumbered assets, totalled USD7.1 billion in March, the latest figure available. The exchange rate has weakened by 40% year-to-date against the US dollar, reaching GHC10:USD1 in September, potentially made worse by the drop in non-resident investment in local-currency debt. Non-resident holdings were GHC23.1 billion at end-August, or 4% of Fitch-forecast 2022 GDP.”