Moody’s Ratings has upgraded Ghana’s long-term issuer ratings in both local and foreign currencies from Caa3 and Ca to Caa2, while also changing the outlook from stable to positive.
The upgrade to Caa2 reflects significant progress in Ghana’s debt treatment, which has alleviated the government’s financial strain.
“Since seeking relief through the G20 common framework for debt treatment in 2022, the government of Ghana restructured local currency debt and debt owed to bilateral official-sector creditors and concluded the exchange of Eurobonds on 9 October rating”, the rating note said.
Moody’s highlighted that since seeking assistance through the G20 common framework for debt treatment in 2022, the Ghanaian government has successfully restructured its local currency debt and the debt owed to bilateral official-sector creditors. This restructuring included an exchange of Eurobonds completed on October 9.
According to Moody’s, the government’s debt burden has decreased from a peak of 93% of GDP in 2022 to an anticipated 81% in 2024. However, the agency cautioned that challenges remain, such as the resumption of debt service payments, fiscal risks leading up to the December elections, and reliance on costly short-term debt, which contribute to ongoing liquidity risks that constrain the rating.
The positive outlook indicates potential for an easing of liquidity risk, bolstered by ongoing fiscal consolidation efforts supported by an International Monetary Fund (IMF) program. Analysts suggest that if the identified risk factors diminish, Ghana’s rating could further improve. Despite setbacks in institutional credibility due to financial difficulties, the country’s remaining institutional capacity presents opportunities for a relatively rapid recovery in credit trends. The IMF program is expected to enhance policy credibility and improve Ghana’s access to affordable funding from official sources.
Moody’s has also upgraded Ghana’s local and foreign currency senior unsecured Medium-Term Note (MTN) program ratings to (P)Caa2 from (P)Caa3 and (P)Ca, respectively. Additionally, a Caa2 rating was assigned to senior unsecured instruments issued as part of the recent debt exchange.
No changes were made to outstanding debt instruments; however, Moody’s plans to withdraw ratings for these obligations once they are settled. Furthermore, the agency raised Ghana’s local currency (LC) and foreign currency (FC) country ceilings by one notch to B2 and B3, respectively, reflecting the upgrade of the sovereign local currency ratings.
Moody’s notes that non-diversifiable risks are incorporated in the LC ceiling, which stands three notches above the sovereign rating. This assessment considers factors such as predictable institutions and government actions, limited domestic political risk, and low geopolitical risk, balanced against a significant government presence in the economy and financial system, as well as external imbalances.
The FC country ceiling, which is one notch below the LC ceiling, takes into account the authorities’ historical access to foreign exchange, despite limitations on capital account openness and ineffective policy measures.
Moody’s emphasizes that Ghana’s comprehensive debt restructuring has considerably alleviated the government’s financial burdens, which was a key reason for the ratings upgrade. Since the debt treatment began in December 2022 under the Common Framework, it has addressed 55% of the total outstanding debt, including a 37% principal haircut on most Eurobonds, representing 20% of total debt. Local currency debt (excluding Treasury Bills) and bilateral official-sector debt were also restructured through extended maturities and reduced coupon rates.
To enhance financial stability, the government utilized a Financial Stability Fund to support local financial institutions involved in the debt exchange. Analysts project that, following the restructuring and the debt service moratorium, the government’s debt will drop to an estimated 81% of GDP in 2024, down from 93% in 2022.
Despite this positive trajectory, foreign exchange risks remain significant, with nearly half of the government debt denominated in foreign currencies. The fiscal outlook is contingent on the government’s ability to maintain its consolidation efforts, ensuring continued access to funding. With the upcoming elections in December 2024, the possibility of fiscal arrears accumulating poses a risk.
Assuming no significant arrears occur, Moody’s forecasts a balanced primary budget for 2024 and a return to a primary surplus of approximately 1.3% of GDP in 2025, similar to the surplus achieved in 2023. The government primarily relies on issuing Treasury Bills, with rates closely aligned to the central bank’s policy rate of 27%, which is notably higher than the inflation rate of 21%. Consequently, elevated liquidity risks continue to constrain the rating.
The positive outlook indicates that liquidity risk may decrease as ongoing fiscal consolidation progresses under the IMF program. The combination of significant fiscal risks ahead of the December elections, resumption of debt service payments, reliance on costly short-term debt, and downward currency pressures represent ongoing challenges. Should these risks dissipate, Ghana’s rating could be elevated.
Moody’s anticipates that gradual disinflation and fiscal improvements will pave the way for a normalization of interest rates on local currency debt, which is the primary borrowing source for the government. This shift would address Ghana’s debt affordability issues and alleviate liquidity risks.
Additionally, with the IMF program in place, official-sector funding may improve, and recent robust gold exports could contribute to a more stable currency, according to the rating note.
Despite Ghana’s recent default undermining institutional credibility, the country’s institutional capacity remains strong enough to potentially reverse the credit trend quickly. The prompt and transparent management of the debt restructuring has bolstered the authorities’ credibility. Current fiscal data for 2024 indicate improved revenue and spending performance compared to the years preceding the restructuring.
Overall, Ghana’s rankings under the Worldwide Governance Indicators for policy effectiveness, rule of law, and control of corruption continue to be relatively strong. Moody’s asserts that the IMF program will help strengthen policy credibility and facilitate Ghana’s access to affordable funding from official-sector sources, thereby mitigating liquidity risks that are constraining the rating.
