Ghana's credit rating is lowered to 'CC' by Fitch.

Ghana's credit rating is lowered to 'CC' by Fitch.

Fitch Ratings has downgraded Ghana's long-term local and foreign currency issuer default ratings (IDRs) to 'CC' from 'CCC.' The agency typically does not assign outlooks to issuers with a rating of 'CCC' or below.

The downgrade is due to the increased likelihood that Ghana will seek a debt restructuring, given mounting financing stress, surging interest costs on domestic debt, and a prolonged lack of access to Eurobond markets. The IMF support program currently being negotiated is likely to require some form of debt treatment due to climbing interest costs and structurally low revenue as a percentage of GDP.

Interest costs reached 47.5% of revenue in 2021 and 54% in the first half of 2022. Interest payments on domestic debt account for approximately 75% of total interest costs. High yields on domestic debt, following a 34% year-over-year spike in inflation as of August 2022, and monetary tightening, with the Bank of Ghana hiking its policy rate to 22.0%, from 14.5% in February, have contributed to this. 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 the first quarter of 2022.

Limited access to external financing is expected to continue until at least an IMF program 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 and USD250 million in syndicated loans from global commercial banks. It can also use its sinking fund. Ghana faces around USD3 billion of external debt service costs in 2023, including amortization and interest.

Persistent downward pressure on reserves is expected in the absence of an IMF program. Official reserve assets fell to USD7.3 billion in June, down from USD9.8 billion in 2021, and gross international reserves, excluding oil funds and encumbered assets, totaled 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 worsened 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.

A deal with the IMF is likely within the next six months, as Ghana has indicated it could request USD2 billion-3 billion. The program could unlock budget support from other official lenders. However, a restructuring will likely be deemed necessary, with local-currency debt treatment potentially included prior to IMF approval, as the IMF is unable to provide financing where it assesses a country's debt to be unsustainable.

The most recent IMF debt sustainability analysis, conducted in 2021, found Ghana at a high risk of debt distress and vulnerable to shock to market access and high debt servicing costs. Interest costs have risen substantially since then.

High interest costs and low revenue are expected to impede fiscal consolidation. Ghana's medium-term fiscal framework in the 2022 budget envisaged narrowing the deficit to below the 5% of GDP ceiling by 2024, based on the expiry of pandemic-related expenditure and higher domestic revenue, driven by new taxes, including an electronic transaction levy. However, implementation delays led to lower revenue and a larger nominal deficit in the first half of 2022 relative to budget forecasts. The government's slim majority in parliament could frustrate attempts to raise tax rates or implement new taxes.

Debt restructuring offers opportunities for financial stabilization, but it also poses challenges that require careful management and policy coordination to mitigate risks and ensure sustainable economic progress. The potential benefits include a reduced debt burden, improved credit ratings, and economic stability. However, there is a risk of creditor holdouts, exchange rate sensitivity, inflation and growth challenges, and investor sentiment issues that could complicate the process and delay economic recovery.

References for substantially material sources cited as key drivers of rating have been provided on Fitch's website. For more information on Fitch's ESG Relevance Scores, visit Fitchratings.com/esg.

Sources: Fitch Ratings, IMF, World Bank Governance Indicators (WBGIs), Bank of Ghana.

1. The downgrade in Ghana's IDRs by Fitch Ratings is attributable to an increased likelihood of debt restructuring due to mounting financing stress, surging interest costs, and a prolonged lack of access to Eurobond markets.
2. The IMF support program under negotiation is likely to necessitate some form of debt treatment due to climbing interest costs and structurally low revenue as a percentage of GDP.
3. High interest costs and low revenue are expected to hinder fiscal consolidation, impeding the narrowing of the deficit to below the 5% of GDP ceiling by 2024, as indicated in Ghana's medium-term fiscal framework in the 2022 budget.
4. Debt restructuring presents opportunities for financial stabilization, but it also poses challenges that require careful management and policy coordination to mitigate risks and ensure sustainable economic progress.
5. The most recent IMF debt sustainability analysis, conducted in 2021, found Ghana at a high risk of debt distress and vulnerable to shock to market access and high debt servicing costs, a situation that has worsened since then with rising interest costs.

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