Rating agency, Moody’s Investors Service (Moody’s), has affirmed Ghana’s long-term issuer and senior unsecure bond ratings at B3.
It has also changed the outlook of Ghana from stable to positive.
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The decisions were announced last Friday in a statement issued by Moody’s in New York.
Positive Reasons
According to the statement, Moody’s has concurrently affirmed the rating of the bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) at B1.
The decision to assign a positive outlook, the statement noted, reflected Moody’s rising confidence that the country’s institutions and policy settings would foster improved macroeconomic and fiscal stability over the medium term in part as a consequence of the reforms implemented under the recent IMF reform programme.
“Those reforms are beginning to bear fruit as seen, for example, in the return to primary fiscal surpluses, measures to smooth the debt maturity profile and increasingly sustainable growth prospects,” it said.
“Pressures and risks remain as evidenced by persistent revenue challenges, a potential repeat of pre-election fiscal cycles and the emergence of significant arrears and further contingent liabilities in the energy sector, all contributing to rising public debt,” it added.
Increasing Confidence
It stated that the positive outlook reflected increasing confidence that the government would manage those pressures in such a way as to sustain and enhance external and fiscal stability.
The decision to affirm the B3 rating balances, for now, those positive medium-term trends and existing challenges, it added.
Flow Reversals
The statement, however, indicated that a key constraint on the rating was the country’s significant exposure to international capital flow reversals, which tended to coincide with exchange rate volatility and rising external and domestic borrowing costs, putting pressure on already weak debt affordability.
“Measures which reduce that exposure by demonstrating reliable liquidity risk management and increasingly firm control over the debt position would support an upgrade to a B2 rating,” it said.
“However, those measures will take time to evidence impact. As a consequence, the outlook is unlikely to be resolved quickly and may even extend beyond the usual 18-month period in order to monitor how the policy unfolds following the forthcoming election and in particular the government’s progress in implementing its energy recovery strategy,” it added.
Deposit Ceilings
Ghana’s foreign and local-currency bond and deposit ceilings, it observed, remain unchanged, namely the foreign-currency bond ceiling at B1, the foreign-currency deposit ceiling at Caa1, and the local-currency bond and deposit ceilings at Ba3.
Giving the rationale behind the rating, the statement explained that for some time, Ghana’s rating had been constrained by two related factors.
First, by the challenges its policymaking institutions have experienced in establishing a consistent set of policies which support macroeconomic and financial stability, and which survive changes of government.
Second, by the high level of external commercial debt holdings which, taken alongside limited net foreign exchange reserves, exposes the government and the balance of payments to a loss of international investors’ confidence in policymakers’ ability to sustain economic and financial stability, raising the risk of a fiscal or balance of payments crisis.
Positive Dev’t
However, it noted, in recent years that Ghana had seen a number of positive developments in key credit metrics, which partly reflect the institutional and fiscal reforms implemented under the four-year IMF programme that was completed in April 2019.
According to the statement, these include a return to sustained economic growth at around five per cent on average supported by the development of domestic hydrocarbon resources and the prospect of sustained non-oil growth driven by the restoration of power supply and renewed infrastructure investment, a structural improvement in the current account dynamics, and fiscal reforms which have resulted in primary surpluses since 2017.
Key fiscal reforms include the Public Financial Management Act (2016) which improves fiscal governance and the Fiscal Responsibility Law (2018) requiring adherence to an overall fiscal deficit ceiling of five per cent of GDP and a primary surplus; 2019 saw a cash deficit of 4.8% of GDP and a primary surplus of 0.9% of GDP — weaker than the initial targets but within overall limits, it explained.
Key Expectation
Moody’s said “it expects a similar outcome this year and a renewed shift to fiscal consolidation following the election.”
It added that measures taken over the past couple of years to recapitalize the financial sector and to address the country’s power deficit (albeit the latter with problematic unintended consequences) also suggested active, moderately effective policymaking and supported rising confidence in policymakers’ ability to sustain economic and financial stability, and to limit the risk of external shocks in the coming years.
Nevertheless, challenges remain, alongside developments which suggest that the roots of the institutional reforms are, for now at least, shallow.
The rise in deficits in 2019 as the election approaches, as in past cycles, suggests a high likelihood that the usual pre-election fiscal stimulus will emerge in 2020, the statement noted.
Fiscal targets had been achieved in part by recording as ‘below the line’ items fiscal costs relating to the recapitalization of the banking sector and to energy legacy debts which had caused the overall debt burden to continue to rise, it added.
The government is contemplating issuing additional, ‘collateralized’, debt to support investment in bauxite refining in part to absorb surplus energy.
Downgrading Ghana
In June 2014, under then President John Mahama, Moody’s downgraded Ghana’s credit rating to B2, with negative outlook.
It got worse a year later in March 2015 when Ghana went further down to B3 with a negative outlook.
As a result, borrowing became more expensive and Ghana had to secure guarantees from the World Bank to even go to the international bond market.
It was the same year Ghana ran to the IMF for a bailout but since 2017, the recovery has been on and the necessary platform for protecting businesses and creating jobs has been strengthened.
Other Ratings
In September 2018, the other credit rating agency, Standard and Poor’s, for the first time in almost a decade, upgraded Ghana from B- to B+.
Experts have said in sourcing for cheaper funds on the international capital market, with Ghana going for another Eurobond early next month, the positive rating should make the yield on our bonds even better for Ghana than in previous years.
BY Melvin Tarlue
