Moody’s keeps economy’s credit outlook at B3 negative

Global credit rating firm, Moody’s Investor Services, has rated the country’s sovereign bond issuance at B3 negative again against hope of a stable outlook, sending a worrying signal to prospective investors should the managers of the economy decide to go to the international market to look for money to finance the budget.

The negative outlook will be a huge disappointment to managers of the economy, given the oversubscription of the country’s US$3 billion bond a few weeks ago – a move government said indicates high investor confidence in the economy.

Moody’s stated in its report the negative outlook reflects the rising risks that the pandemic poses to Ghana’s funding and debt service, as the economy is particularly exposed to such shocks because of its high reliance on external financing, both in local and foreign currency, and very weak debt affordability.

Four main factors determine Moody’s determination of a sovereign government’s bond rating. These are: economic strength, institutions and governance strength, fiscal strength and susceptibility to event risk.

Matching these to Ghana’s credit profile, the rating agency said there is elevated debt burden and weak debt affordability, track record of revenue underperformance relative to targets, and elevated exposure to international capital flow reversal, all of which have been worsened by the coronavirus pandemic – contributing to maintaining the same rating of the country’s credit profile after it was downgraded from B3 stable a year ago.

The country’s public debt as of December 2020 had hit 76.1 percent of GDP, according to the 2021 budget. Debt financing and debt service gulp up all revenue mobilised in the country as interest payment accounts 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.

However, the rating agency added that it will upgrade the country’s outlook to stable if efforts are made by government to ease financing pressures in the economy either through increasing revenue or finding cheaper sources of debt.

“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.

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,” the report stated.