International ratings agency Fitch has lowered Ghana’s long-term foreign currency issuer (IDR) default rating to “B-” from “B” with a negative outlook.
The downward revision to Ghana’s IDRs and negative outlook reflects the sovereign country’s loss of access to international capital markets in the second half of 2021, following a pandemic-related crisis. [COVID-19] soaring public debt.
Fitch, in a report, said that “this comes against a backdrop of uncertainty over the government’s ability to stabilize debt and against a backdrop of tightening global financing conditions. In our view, Ghana’s ability to achieve planned fiscal consolidation efforts could be hampered by increased reliance on domestic debt issuance with higher interest costs, in the context of an expenditure ratio of already exceptionally high interest/revenue.
He pointed out that Ghana’s effective loss of access to international bond markets increases risks to its ability to meet medium-term financing needs.
However, he said “in our view, Ghana has sufficient liquidity and other external financing options available to cover short-term debt service without issuing Eurobonds. However, there is a risk that non-resident investors in the local bond market sell their holdings, especially if confidence in the government’s fiscal consolidation strategy weakens further, putting downward pressure on its reserves.
Ghana unable to issue Eurobonfrom in 2022
The international rating agency assumed that Ghana would not be able to issue bonds in international capital markets in 2022 and the prospects of doing so in 2023 are uncertain. “Ghana’s international reserve position has become very dependent on the annual issuance of Eurobonds. Additionally, as of July 2021, non-resident investors held just under 20% ($5.8 billion) of Ghana’s outstanding domestic public debt. Although the maturity of these holdings is long-term, an exit would put further downward pressure on Ghana’s reserves.”
Fitch projects that Ghana will face about $2.7 billion (3.3% of GDP) in sovereign foreign interest service and amortization payments in 2022.
“We believe the government can service its external debt without market access given its reserves, which we estimate at $7.9 billion at end-2021 (3.2 months of current external payments). Reserves have were bolstered by $3 billion in Eurobonds in the second quarter of 2021, which helped the government meet its roughly $3.5 billion (4.7% of GDP) in debt service charges external sovereign debt last year, and by the IMF’s allocations of $1 billion in SDRs,” he explained.
The budget deficit will shrink to 9.1% in 2022
Fitch projects the general government fiscal cash deficit will narrow to 9.1% of gross domestic product in 2022, from 15.1% in 2020 and 12.5% in 2021, including 3% of GDP in domestic arrears clearance and payments related to the public energy sector.
“The 2022 deficit would still be more than double the 2022 median “B” of 4.6% and the risk to public finances would remain high. The government envisages a deficit (including support for the financial and energy sector) of 7.4% in 2022 and 5.5% in 2023, with a drop below the legal deficit ceiling of 5% in 2024,” he said. He underlines.
“The government’s fiscal consolidation plans focus on revenue measures adopted in the 2022 budget, including a new 1.75% electronic tax on certain digital transactions and changes to the calculation of certain taxes and import duties. The medium-term fiscal framework projects that these new revenue measures, together with the reduction in pandemic-related spending, will lead to an increase in government revenue to 20.0% of GDP in 2022 from around 15.4% in 2021,” he added.
Fitch believes Ghana will achieve moderate fiscal consolidation over the medium term, but the government’s forecasts are too optimistic.
Ghana has struggled with earlier efforts to raise revenue/GDP and public finances deteriorated even before the pandemic, although this was partly linked to the cleanup in the financial and energy sector.
