Moody’s downgrades Ghana’s credit rating from Caa2 to Ca

Ghana has been downgraded deeper into junk territory by Moody’s Investors Service on the likelihood that private creditors will incur steep losses during the government’s planned debt restructuring.

The country’s credit rating was slashed by two levels to Ca, the second-lowest score at Moody’s, according to a Tuesday statement. That puts Ghana on par with Sri Lanka, which is in default.

The downgrade follows plans in Ghana’s proposed 2023 government budget to restructure both local and foreign debts.

“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,” analysts Lucie Villa and Marie Diron wrote in the statement.

Outlook changed to stable

At the same time, Ghana’s outlook was changed to stable as the restructuring will likely happen in coordination with creditors and under a program with the International Monetary Fund, according to Moody’s.

“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.”

The West African country formed a committee last month to start talks with domestic bondholders to restructure its local-currency debt.

Ghana’s Eurobonds have been among the worst performers in emerging markets since Bloomberg reported the plans for the local debt recast in September, handing investors losses of almost 12% in that period, according to data compiled from a Bloomberg index.

The nation’s debt-exchange program will replace existing terms and exchange debts with longer tenors at cheaper rates, said Abena Osei Asare, a deputy minister of finance. The plans come after an analysis of debt sustainability showed the nation faces a high risk of distress.

Fitch Ratings scored the nation at CC, two notches above default. S&P Global Ratings also assigned it CCC+, seven levels into junk.

Ghana has suffered a streak of downgrades from the beginning of 2022.

Finance Minister Ken Ofori-Atta, in his recent budget statement, blamed the downgrades on disagreements in parliament over revenue mobilisation measures.

“Mr Speaker, a year ago, I came to present a budget with significant revenue measures to tackle our fiscal difficulties, finance the transformative agenda of government and sustain the post-COVID-19 recovery”, he recalled on Thursday, 24 November 2022 when he presented the 2023 budget in parliament.

“However, what started as a political disagreement over revenue measures in this House, triggered a series of events that significantly undermined the credibility of our budget, consequently leading to serious economic challenges, as investor confidence hit a new low”, Mr Ofori-Atta noted.

Though the 2022 budget was read in November last year, it was passed in March 2022 and implemented in May of the same year due to intractable disagreements between the minority and majority sides of the house.

Mr Ofori-Atta told the house that the resultant low investor confidence “manifested in credit rating downgrades which triggered the closure of Ghana’s access to the international capital market; tightening domestic financing conditions; and increasing cost of borrowing”.

The combined effects of the developments, he noted, “contributed to the rapid depreciation of the cedi and compounded the high debt service levels”.

“Mr Speaker, our inability to access the international capital markets meant that for the first time in our administration, we did not have the needed foreign currency to complement our forex earnings, he noted.

“We have had to make strenuous efforts to meet our import bill, which exceeds US$10.0 billion annually”, the minister mentioned.

“Considering our low foreign earnings, it has been difficult to meet our import requirements including crude oil and petroleum products of about US$400m (GHc4.80 billion) a month”, he confessed.

At the same time, he said the ministry of finance still needs to find about US$1.0 billion annually “to keep our lights in our homes and workplaces”.

“Mr Speaker, the demand for foreign exchange to support our unbridled demand for imports undermines and weakens the value of the cedi”, he added.

Mr Ofori-Atta indicated: “This contributed to the depreciation of the cedi, which has lost about 53.8 per cent of its value since the beginning of the year”.

“Compared to the average 7 per cent average annual depreciation of the Cedi between 2017 and 2021, the current year’s depreciation, which is driving the high costs of goods and services for everyone, is clearly an aberration – a very expensive one”.

“The increases in fuel prices (diesel currently GHS20.5 and petrol GHS16.8) has led to increases in prices of most goods and services”, he noted.

Also, he said: “Inflation which we managed to bring down from 15.4 per cent at the end of 2016 to 7.9 per cent at the end of 2019 and remained in single digits till the pandemic hit in March 2020 is now 40.4 per cent”.

“It is not only the individuals and households who are adversely affected by the depreciation of the cedi. For us at the ministry of finance, the depreciation of the cedi seriously affects our ability to effectively manage our debt”.

“Indeed, our stock of debt has increased by GHC93 billion this year alone due to the depreciation of the cedi since the beginning of 2022. Even as the state struggles to raise sufficient revenues, high inflation rates continue to eat away the already meagre wages of the average Ghanaian”.

“The lesson from this relapse in macro-economic stability makes us even more determined, as your government, to permanently restructure and transform this economy and build resilience”.