Moody’s Investors Service (“Moody’s”) has downgraded Ghana’s long-term issuer ratings to Ca from Caa2 and changed the outlook to stable.
This concludes the review for the downgrade that was initiated at the time of the 30 September 2022 rating action.
The Ca rating reflects Moody’s expectation that private creditors will likely incur substantial losses in the restructuring of both local and foreign currencies debts planned by the government as part of its 2023 budget proposed to Parliament on 24 November 2022. Given Ghana’s high government debt burden and the debt structure, it is likely there will be substantial losses on both categories of debt in order for the government to meaningfully improve debt sustainability.
The stable outlook balances Moody’s assumption that the debt restructuring will happen in coordination with creditors and under the umbrella of a funding program with the IMF against the potential for a less orderly form of default that could result in higher losses for private-sector creditors.
Moody’s has also downgraded Ghana’s senior unsecured debt ratings to Ca from Caa2 and the senior unsecured MTN programme ratings to (P)Ca from (P)Caa2, along with downgrading to Caa3 from Caa1 the rating of Ghana’s bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable), concluding the concurrent reviews for downgrade. The latter reflects a blended expected loss consistent with a one-notch uplift on the issuer rating.
Finally, Moody’s has lowered Ghana’s local currency (LC) and foreign currency (FC) country ceilings to respectively Caa1 and Caa2, from B2 and B3, mirroring the downgrade of the sovereign ratings by two notches. Non-diversifiable risks are captured in a LC ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and government actions, limited domestic political risk, and low geopolitical risk; balanced against a large government footprint in the economy and the financial system and external imbalances. The FC country ceiling one notch below the LC country ceiling reflects constraints on capital account openness and very weak policy effectiveness against authorities’ history of providing access to foreign exchange.
RATINGS RATIONALE
Moody’s expects that the restructuring of local and foreign currencies debts announced by the government on 24 November 2022 as part of its budget proposal for 2023 will likely result in significant losses for private creditors. The government has been grappling with increasingly high and costly debt for more than a year now, leaving increasingly limited policy levers to arrest the negative spiral between high inflation and elevated interest rates, depreciating local currency and rising debt. As such, restructuring debt has progressively appeared as a necessary condition to secure debt sustainability. Moreover, given the structure of government debt, equally split between foreign and local currency, its elevated level (forecast at 104% of GDP by end of this year) and cost (interest payments should consume 58% of revenue in 2022), substantial losses to creditors as part of the debt exchange are likely in Moody’s view.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook primarily reflects Moody’s assumption that the debt restructuring will happen in a coordinated and orderly manner with creditors under the umbrella of a funding program with the IMF. The risk of higher losses for private-sector creditors than currently assumed by Moody’s is relatively contained, supported by Ghana’s economy and institutional framework.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Ghana’s ESG Credit Impact Score is very highly negative (CIS-5), reflecting its high exposure to social risks. Resilience to environmental and social risks is very weak, constrained by low wealth and very high debt levels.
Ghana’s credit profile is moderately exposed to environmental risks (E-3 issuer profile score). The cocoa sector is a large contributor to GDP, exports and employment and being demanding in water, it exposes the country to climate changes and especially droughts. More generally, the size of the agricultural sector exposes the economy to weather-related disruptions and the effects of climate change. Ghana is also exposed to water management risks stemming from a lack of access to potable water in some areas.
The exposure to social risk is highly negative (S-4 issuer profile score), driven by limited access to quality housing and education, especially in rural areas. Risks related to health and safety and access to basic services are moderately negative. While the government has put in place measures aimed at reducing poverty and inequality and strengthening social safety nets, its fiscal challenges constrain its scope for meaningful reduction in social risks given more than half of government revenue is consumed by interest payments.
Governance is very highly negative with a G-5 issuer profile score. Overall, Ghana’s institutions have shown some effectiveness, however domestic revenue mobilisation challenges and significant constraints on fiscal policy effectiveness manifest in very weak debt affordability. The authorities have undertaken some institutional reforms on the revenue and competitiveness front, which will invariably take time to produce results. The government’s plan to resort to a restructuring of its debt, which constitutes a default under Moody’s definition, to improve its sustainability is ultimately a sign of institutional weakness. Governance considerations are a driver of today’s rating action.
The heightened default risk associated with Ghana’s announcement of a plan to restructure debt prompted the publication of this credit rating action on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com. In addition, by virtue of the ratings having been on review for downgrade, the conclusion of the review had to deviate from the previously scheduled date in the sovereign release calendar.
GDP per capita (PPP basis, US$): 6,245 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 5.4% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 12.6% (2021)
Gen. Gov. Financial Balance/GDP: -8.5% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.2% (2021) (also known as External Balance)
External debt/GDP: 44.5% (2021)
Economic resiliency: b2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 28 November 2022, a rating committee was called to discuss the rating of the Ghana, Government of. The main points raised during the discussion were: The issuer’s institutions and governance strength, have materially decreased. The issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Ghana’s credit profile will likely remain very weak until after the debt has been restructured. Albeit unlikely, an expectation of smaller losses for private sector creditors than currently implied by the Ca rating as part of the debt restructuring could prompt an upward revision to the rating. Post-restructuring, the government’s progress in addressing its credit weaknesses such as more effective fiscal and monetary policy, with higher government revenue generation, would in time lower future redefault risk and support the rating.
WHAT COULD CHANGE THE RATINGS DOWN
Conversely, indications that the debt restructuring contemplated by the government will lead to larger losses for private-sector creditors than implied by the current Ca rating would exert downwards pressure on the rating. This could result from a protracted restructuring period, possibly because of difficult negotiations with all stakeholders, or additional external shocks.
The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
