The first full sovereign credit rating of Ghana for 2021 was delivered last week, and it left rating sentiment unchanged from last year. This came from global credit rating firm Moody’s Investor Services rating the country’s sovereign bond issuance at B3 negative, exactly the same as last year when the firm downgraded Ghana from B3 stable as the coronavirus pandemic was beginning to upset the country’s economic performance and prospects.
This has disappointed Ghana’s economic managers given the oversubscription of the country’s US$3 billion Eurobond issuance just a few weeks ago which supposedly was a sign of renewed confidence in the economy. Actually they will now be thankful that they went to the international capital market for its latest Eurobond issuance before the latest rating was released.
Indeed it appears to justify the inordinate risk premium demanded by investors in the most recent Eurobond issuance – which took the form of high coupon rates demanded – which persuaded government to issue just US$3 billion rather than the full US$5 billion it had originally intended to take.
The negative outlook suggests that Ghana’s macroeconomic fundamentals could worsen before they improve and this sentiment could be problematic for government’s efforts to refinance shorter term cedi denominated bonds – which are classified as domestic debt but are held in significant proportions by foreign investors with foreign currency exposure implications – that will be maturing over the coming months.
Moody stated in its latest assessment that the negative outlook reflects the rising risks that COVID 19 poses to Ghana’s funding and debt servicing requirements as the economy is particularly exposed to shocks because of its heavy reliance on external financing, both in local and foreign currency, coupled with weak debt affordability.
Indeed order not to crowd out the private sector from the local credit market, Ghana has increasingly turned to external financing of the public debt, a strategy it has also relied on to beef up gross international reserves and thus enhance the confidence of foreign exchange markets in order to retain exchange rate stability. While the value of the foreign currency and the cedi denominated components of the public debt are roughly equal, the fact that about a fifth of the latter is actually owed to foreign creditors tips the scale in their favour.
Government learnt a harsh lesson with regards to the possible implications of such exposure in early 2019 when an ill-timed cut in the Monetary Policy Rate by the Bank of Ghana and worries over the likelihood of fiscal indiscipline following the country’s exit from the International Monetary Fund’s Extended Credit Facility – especially with a general election on the horizon – led to difficulties in refinancing maturing medium and long term domestic debt. This created both a financing crisis and foreign exchange shortages that led to the cedi being ranked as one of the worst performing currencies in the world during the first quarter of that year.
Since then government has taken steps to substitute part of its foreign exposure with regards to cedi denominated medium to long term bond holdings, with local exposure in the form of institutional investment from pension funds in particular; foreign holdings of cedi denominated bonds has fallen from a peak of over 30 percent of total outstanding eligible debt (bonds with tenors of two years or more) to about 18 percent currently. But added to the foreign debt this still means that about 60 percent of the public debt is owed to foreign investors who are notoriously fickle.
Instructively, Moody’s in an earlier assessment this year claimed that Ghana has the second highest External Stress Vulnerability in sub Saharan Africa.
Said the report: “In SSA, higher external vulnerability indicators – which are a measure of short-term debt and upcoming external debt maturities against international reserves – will be more challenging for sovereigns outside of monetary unions. Zambia and Ghana will see the greatest EVI pressures, with 2021 levels forecast to be 509% in Zambia and 143% in Ghana”.
This puts Ghana in bad company; last year Zambia became the first sub Saharan African country to default on servicing its international bond issuances.
Moody’s points to Ghana’s rising public debt – which reached 76.1 percent of Gross Domestic Product, well above the generally accepted debt sustainability threshold of 70 percent by the end of last year – and which both it and the World Bank expects to pass 80 percent of GDP before it peaks and ultimately declines.
It also worries about Ghana’s inability to meet its revenue generation targets, although last year was actually an exception; the revised target, lowered because of COVID 19 was exceeded. However this has persuaded government to set a substantially more ambitious target for 2021 and Moody’s doubts that it will be met.
Besides all these, Ghana has weak debt servicing affordability Moody’s points out. Debt servicing will this year account for 49.5 percent of projected total revenue; statutory payments accounts for 24.9 percent; and wages and salaries account for 27.3 percent, putting the total to 101.7 percent of total revenue. This means half of revenue generated in the country goes into debt service alone, a development that has led to the negative outlook rating by Moody’s.
“Debt affordability remains Ghana’s main credit constraint and continued to deteriorate in 2020, driven by both the declining revenue share and a higher interest bill, reflecting greater recourse to borrowing to fund spending,” Moody’s noted.
Instructively, Moody’s latest assessment is very similar to the latest one from Fitch one of the other two credit rating agencies that rates Ghana.
Just last month, in March, Fitch issued a ratings update on Ghana – but not a full new credit rating – based on its assessment of the 2021 budget. In its assessment it asserted that the slow pace of the consolidation path outlined by Ghana’s 2021 budget statement, presented on 12 March, and by the accompanying medium-term fiscal framework leaves Ghana exposed to a heavy debt-service burden and risks of fiscal slippage.
Noted the report: “We indicated that our assessment of the medium-term trajectory of public debt would be an important rating sensitivity when we affirmed Ghana’s Long-Term Foreign-Currency Issuer Default Rating at ‘B’ with a Stable Outlook in October 2020.
Interestingly, Fitch includes energy and financial sector reform costs in its computations, just like the IMF does but which government refuses to do on the grounds that these are one-off expenditures rather than usual spending activities. Consequently, Fitch computed that: “The budget aims to reduce the fiscal deficit from 13.8 percent of GDP in 2020 (including off-budget energy and financial-sector restructuring costs) to 10.8 percent of GDP in 2021, 7.5 percent in 2022 and below 5 percent by 2024.
“There is a significant risk that public finances could fall short of the goals outlined in the budget, particularly given the government’s lack of a clear majority in parliament. The gradual pace of projected consolidation will mean Ghana’s ability to absorb any new shocks will remain weak for an extended period. Any such shocks would increase the likelihood of government debt remaining on an upward trajectory beyond 2022.
“The high cost of the government’s debt burden is an important rating weakness and will continue to squeeze the government’s other spending priorities. According to the government, interest costs were equivalent to 6.4 percent of GDP in 2020, or 45 percent of total fiscal revenue. The large increase in debt in 2020 means that interest costs will increase in 2021 – we forecast interest spending to breach 50 percent of government revenue in 2021, well above the median of around 11 percent for ‘B’ rated sovereigns”.
”Fitch expects Ghana’s interest expense to fall as a share of revenues and GDP from 2022, although it will remain above the ‘B’ median for many years to come. We estimate that the weighted-average interest rate on domestic debt fell to 17% in 2020 from over 20% in 2016. Ghana has one of the highest real policy rates among emerging-market sovereigns, which indicates that interest rates may have further room to fall, so long as the government can maintain its policy credibility and the global environment supports a falling rate of inflation.
Just like Moody’s, Fitch also forsees the possibility of the fiscal deficit exceeding government’s target. “The government plans to increase fiscal revenues, aided by 1 percent increases in VAT and the National Health Insurance Levy. However, achieving total revenue of an average of 16.8 percent of GDP over 2021–2024 may be difficult. Government revenue averaged 15.4 percent of GDP over 2016–2019”
Even ahead of a new sovereign credit rating from Standard and Poors, Moody’s rating and Fitch’s update could be problematic for Ghana. The country began issuing Eurobonds annually since 2013 and the first four in the series – issued by the Mahama administration – primarily have ten year tenors. This means that Ghana will be facing maturities of some US$1 billion a year over the four year period starting in 2023.
The unflattering credit ratings announced so far this year will not be helpful to the effort to refinance these impending debt maturities; even though Ghana is likely to secure the requisite bond subscriptions to refinance the maturities as they arise, this may be at high coupon rates, the very opposite of the lowered cost of debt servicing which Moody’s requires in order to improve Ghana’s credit rating.
Indeed, Moody’s is warning that Ghana will find it expensive to borrow to run its economy due to a decline in revenue and an increase in interest costs.
“The negative outlook reflects the rising risks that the pandemic poses to Ghana’s funding and debt servicing due to its exposure to shocks from a high dependence on external financing,” says Kelvin Dalrymple, Vice President – Senior Credit Officer, at Moody’s.
According to Moody’s, the challenge now for Ghana is to implement an austere budget by limiting spending or find cheaper loans to finance the deficit left by its reduction in earnings. But neither prospect looks likely.
Cutting expenditure would ordinarily be on the cards now that the incumbent administration has won a second and final term in office but these are not normal times; COVID 19 continues to elevate both health costs and social protection expenditure.
Meanwhile the cost of borrowing on the international capital markets is more likely to rise than to fall as economic growth resumes globally and monetary easing is no longer direly needed. On the other hand Ghana no longer has the access to concessionary finance that it used to, having been forgiven its debts to bilateral and multilateral creditors under the HIPC and MDRI initiatives during the 2000s and having attained middle income status a decade ago following its first rebasing of the economy. Further more successive governments have found commercial borrowing quicker and easier to secure and even more importantly, they can do whatever they like with the proceeds rather than have to follow a programme set by the creditors.
Says the report: “We would likely change the outlook to stable if we conclude that financing pressures were abating, either through increasing evidence that the government is able to limit the increase in its funding needs or confidence that it will be able to secure sufficient funding at moderate costs”.
It adds: “A stabilisation and reduction in Ghana’s debt-service ratio would ease refinancing risks and support an improvement in its debt-affordability metrics. The implementation of measures that would arrest the rise in direct and contingent debt and provide confidence that the debt burden will fall would also support a return to a stable outlook. Ultimately, as current pressures dissipate, the improving trends evident prior to the coronavirus shock would likely emerge”.
Indeed Moody’s acknowledges that Ghana’s dire straits are primarily the result of the coronavirus pandemic which has upset Ghana’s erstwhile impressive economic path. Moody’s agrees the COVID-19-induced contractions are considered a departure from the country’s leap of 6.5% in 2019.
Again, it points out that the Ghanaian economy is more diversified than Nigeria’s oil-dependent one and could rebound faster if it reduces its exposure to foreign borrowing.
Unlike under the previous administration (the Mahama administration) which regularly disputed the assertions of the credit rating agencies, sometimes resulting in acrimony, the incumbent government prudently takes them on the chin but explains why it has taken the path leading up to them. In this vein, last October in a media interview, Finance Minister Ken Ofori-Atta confessed that government was far more concerned about saving the lives and livelihoods of Ghanaians from the ravages of COVID 19 than about the debt being incurred to do it.