International ratings agency, Fitch, has downgraded Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’ with a negative outlook.

The downgrade of Ghana’s IDRs and Negative Outlook reflect the sovereign’s loss of access to international capital markets in the second-half of 2021, following a pandemic-related [COVID-19] surge in government debt.

Fitch in a report said “this comes in the context of uncertainty about the government’s ability to stabilise debt and against a backdrop of tightening global financing conditions. In our view, Ghana’s ability to deliver on planned fiscal consolidation efforts could be hindered by the heavier reliance on domestic debt issuance with higher interest costs, in the context of an already exceptionally high interest expenditure to revenue ratio.”

It pointed out that Ghana’s effective loss of market access to international bond markets increases risks to its ability to meet medium-term financing needs.

However, it said “in our view, Ghana has sufficient liquidity and other available external financing options to cover near-term debt servicing without Eurobond issuance. However, there is a risk that non-resident investors in the local bond market could sell their holdings, particularly if confidence in the government’s fiscal consolidation strategy further weakens, placing downward pressure on its reserves.”

Ghana unable to issue Eurobonds in 2022

The international ratings agency assumed that Ghana will be unable to issue bonds on international capital markets in 2022 and prospects for doing so in 2023 are uncertain. “Ghana’s international reserve position has become highly reliant on annual Eurobond issuance. Moreover, as of July 2021, non-resident investors held just below 20% ($5.8 billion) of Ghana’s outstanding domestic government debt. While the maturity of these holdings is long-term, an outflow would put additional downward pressure on Ghana’s reserves.”

Fitch forecasts that Ghana will face approximately $2.7 billion (3.3% of GDP) in sovereign external interest service and amortisation payments in 2022.

“We believe that the government can meet its external debt servicing without market access given its reserves, which we estimate at $7.9 billion at end-2021 (3.2 months of current external payments). Reserves were bolstered by $3 billion in Eurobonds in second quarter 2021, which helped the government to meet its approximately $3.5 billion (4.7% of GDP) in sovereign external debt servicing costs last year, and by the $1 billion IMF SDR allocations”, it explained.

Fiscal deficit to narrow to 9.1% in 2022

Fitch forecasts that the general government fiscal cash deficit will narrow to 9.1% of Gross Domestic Product in 2022, from 15.1% in 2020 and 12.5% in 2021 including 3% of GDP in domestic arrears clearance and payments related to the state-owned energy sector.

“The 2022 deficit would still be more than twice the 2022 ‘B’ median of 4.6% and risk to public finances remain high. The government envisages a deficit including financial and energy sector support of 7.4% in 2022 and 5.5% in 2023, with a fall to below the legal deficit ceiling of 5% in 2024”, it stressed.

“The government’s fiscal consolidation plans are focused on revenue measures adopted in the 2022 budget, including a new 1.75% e-levy on certain digital transactions and changes to the calculation of certain taxes and import duties. The medium-term fiscal framework envisages that these new revenue measures, together with fading pandemic-related expenditure, will drive an increase in government revenue to 20.0% of GDP in 2022 from an estimated 15.4% in 2021”, it added

Fitch believed that Ghana will achieve moderate medium-term fiscal consolidation, but that the government’s forecasts are overly optimistic.

Ghana has struggled with earlier efforts to raise revenue/GDP and public finances have been deteriorating even before the pandemic, albeit partly related to the clean-up in the financial and energy sector.