Fitch Ratings has upgraded Ghana’s Long-Term (LT) Local-Currency (LC) Issuer Default Rating (IDR) to ‘CCC’ from ‘RD’. The issue ratings on local-currency bonds issued domestically that have not matured yet have also been upgraded to ‘CCC’ from ‘D’.
Fitch has affirmed Ghana’s Long-Term Foreign-Currency (FC) IDR at ‘RD’. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.
The issue ratings on local-currency notes issued domestically that had a maturity date of 6 February 2023 and for which the remaining due principal payments were made on 13 March 2023 have been withdrawn given the expiry of these notes.
Key Rating Drivers
Domestic Debt Exchange Completed: The upgrade of the ratings on Ghana’s LC denominated debt follows the completion, effective 21 February 2023, of the domestic debt exchange programme by the Republic of Ghana. Fitch viewed this transaction as a distressed debt exchange in a context of heightened fiscal pressures, with interest costs amounting to 54% of revenues in 1H22, and lack of access to international capital markets.
Payments on LC Bonds Resumed: Two principal payments on bonds issued prior to the domestic debt exchange were due on 6 February 2023 and 20 February 2023. These payments, which remained due to holders who were either ineligible for the domestic debt exchange or who opted out of the domestic debt exchange, were made on 13 March 2023. The upgrade of Ghana’s LTLC IDR follows this resumption in payments on LC bonds that cures the default on LC debt.
Enhanced Liquidity: Fitch estimates that the domestic debt exchange allows Ghana to reduce its interest payments in 2023 by around 10% of expected revenues, or 1.6% of GDP. Gross financing needs this year have been reduced by 5% of 2023 GDP. In 2024, interest payments would be lowered by 6% of revenues, or 0.9% of GDP. According to Fitch’s forecasts, the domestic debt restructuring together with the suspension of external debt service, significantly reduces Ghana’s cash fiscal deficit in 2023 to 4.5% of GDP in 2023.
Solvency Concerns Remain Critical: The domestic debt exchange has increased the debt-to-GDP ratio by 0.6pp with payment-in-kind coupons corresponding to an increase in the face value of the new bonds compared to the face value of tendered bonds. Despite a substantial redemption reprofiling and significantly lowered interest rates, the present-value of public debt-to-GDP has been reduced by only 1pp using the standard 5% discount rates that applies in the IMF/World Bank debt sustainability framework for low-income countries. Fitch estimates the present value to be slightly above 100% after the completion of the domestic debt exchange.
IMF support for Ghana will likely depend on the government’s ability to show a path towards bringing the present value of debt to 55% of GDP over the forecast horizon on the basis of the IMF/World Bank debt sustainability analysis and the ability of official bilateral creditors to provide financing assurances in the context of the Common Framework external debt restructuring that authorities have requested. Fitch does not expect the provision of financing assurances, which will pave the way for an IMF Board approval of the ECF arrangement and for a new debt sustainability analysis to be published, before the end of 2Q23.
Financing Still Constrained: Despite the materialisation of increased confidence on the LC debt market following the completion of the domestic debt restructuring, with yields on 91-day T-bills reaching 18.5% in March 2023 after 35.7% in February 2023, Fitch expects yields on T-bill auctions to remain elevated as inflation remains above 50% yoy. We do not foresee a resumption in T-bonds auctions in the near term. Although the suspension of debt service lowers the current account deficit, which Fitch forecasts at 2.8% of GDP in 2023 after 4.1% in 2022, lack of access to the international capital market will continue to weigh on reserves, but more moderately than in 2022.
Foreign-Currency Debt Not Affected: Fitch downgraded the LTFC IDR to ‘RD’ from ‘C’ on 21 February 2023 following the expiration of the grace period for a missed Eurobond coupon payment. This missed payment was consistent with the partial suspension on external debt payments announced by the government in December 2022. Ghana subsequently asked official creditors for a restructuring of its external debt under the G20 Common Framework.