The international rating agency Fitch has said that Ghana could once again access the international capital market if the country opts for a program with the International Monetary Fund (IMF).
Asked about the prospects for new sources of external financing and medium-term fiscal consolidation in a series of podcasts in which Mr. Toby Iles, Head of Sovereign Ratings for the Middle East and Africa, introduced Mr. Jermaine Leonard , director at Fitch Sovereign and lead analyst for Ghana and Zambia, the latter said: “Along with the reduction of international reserves and the use of IMF SDRs, we expect the government to be able to find additional external funding; this could come from private lending from international commercial banks, or, perhaps, additional lending from official lenders – an IMF program is one possibility. This would likely re-open international capital markets in Ghana. Ghana completed an IMF program in 2019 but was reluctant to revert to a program. That said, Fitch thinks this would be the most likely outcome if the government were under real financial stress.”
Above all, he added, “I would like to note that we do not expect it to be like Zambia, where negotiations with the IMF dragged on for almost two years and only resulted in following a default of payment and a change of government”.
“As far as fiscal consolidation is concerned, we expect a reduction in the budget deficit, but the problem of low public revenues and the rigidity of the budgetary structure will persist. Ghana’s 2020 budget projected a reduction in the deficit to 7% in 2022 and 5.3% of GDP by 2023. We think it is optimistic, our forecast calls for a reduction in the budget deficit to around 8% of GDP by 2023”.
“Now this should be a significant consolidation, as the overall fiscal deficit was 15% of GDP in 2020.”
Furthermore, he said, “we believe that much of the deficit reduction will come from COVID-related spending that will not be on budget and that the government will continue to face weak revenue mobilization. which will present some challenges as interest charges remain high and the government continues to realize contingent liabilities from the energy sector.
In conclusion, he noted, “we expect some fiscal consolidation, but at a slower pace than projected in the government’s medium-term fiscal framework and some notable risks could materialize over this period.” .
A few days ago, Ghana’s Finance Minister Ken Ofori-Atta said the country’s access to the international market to borrow had been restricted.
Speaking at a town hall meeting on e-direct debit in the Volta region on Friday, March 4, 2022, Mr. Ofori-Atta confessed: “I tell you that because of what we are doing, now , our access to the international market is being reduced to some extent”.
“Now even when we go we will pay $500 million over 10 years if I were to issue a billion cedi paper and that is big and cannot be allowed,” he explained.
Fitch downgraded Ghana’s Long-Term Foreign Currency Issuer (IDR) default rating to ‘B-‘ from ‘B’ with a negative outlook in January 2022.
Ghana’s IDR downgrade and negative outlook, the rating agency said, reflected the sovereign’s loss of access to international capital markets in the second half of 2021, following a spike in public debt linked to the the pandemic.
Fitch, in a report, said: “This comes amid 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.
Speaking about the drivers of Ghana’s ratings downgrade and negative outlook, Mr. Leonard said, “The main driver of the downgrade to B- and negative outlook is the sovereign’s loss of access to international bond markets.” .
“We believe that not being able to issue Eurobonds raises some concerns about Ghana’s external liquidity, especially as we expect global funding conditions to remain tight for some time and this also exacerbates the existing weaknesses in Ghana’s public finances”.
According to him, “Ghana is not in a situation where the government constantly has to roll over its hard currency debt or where the debt market is entirely dependent on non-resident investors”.
In fact, Mr. Leonard added, “Ghana ended 2022 with an international reserve position which we estimate at $7.9 billion and which is just above three months of current external payments and that is a improvement for Ghana”.
“Ghana’s reserves have averaged around two and a half months of cover over the past ten years, so the improved reserve position will enable Ghana to meet its external debt service payments in 2022. “.
“That said, Ghana’s international reserve position has become quite dependent on the issuance of Eurobonds for replacement,” he pointed out.
Continuing, he noted: “If you were to look at a historical chart of monthly reserve levels, you would notice the peaks and valleys that correspond to the regular issuance of Eurobonds followed by the gradual drawing down of reserves until the next bond issue.
“Additionally, non-residents hold about 20% of Ghana’s domestic public debt and that’s just under $6 billion. These are all medium and long-term issues, which limits the risk of capital flight, but our concern is the slow and steady depletion of reserves, but there is also a risk that foreign investors will sell what they hold and withdraw their dollars from Ghana. , which would put additional pressure on the reserves”.
The other concern, Mr. Leonard mentioned, “specifically relates to public finances”, explaining: “Ghana has a medium-term debt sustainability problem which will require strong fiscal consolidation to bring debt levels down to a downward trajectory, but beyond the level of debt alone, there are issues of debt affordability; Ghana’s debt is more than five times its annual government revenue and annual interest charges are just under half of government revenue So fewer external financing options will mean increased reliance on more expensive domestic debt, which will keep the interest burden high, making consolidation more difficult “.
On what could influence a stable rating and a positive outlook for the country, Mr. Leonard said: “On the positive side, what could things lead to a stable rating? A resumption of access to international capital markets would be significant and could stem from an IMF program or a change in investor sentiment. In the medium term, we will pay attention to the position of international reserves and whether Ghana can see an increase in non-debt creating flows like FDI and we will also pay attention to the government’s ability to implement its fiscal consolidation plan. and put public sector debt on a downward path”.
“In terms of sensitivity to negative ratings, again reserve levels will be important as a measure of external liquidity and we will also monitor the government’s ability to find new external funding to meet its debt service obligations. debt. In addition, we will pay attention to the level of fiscal consolidation that the government can achieve as well as any signs of tension in the domestic debt market”.
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