Ghana’s effective loss of access to international markets increases risks to its ability to meet medium-term financing needs, says Fitch Ratings.
Ghana has sufficient liquidity to cover near-term debt servicing without market financing, but there is a danger that non-resident investors in the local bond market could sell their holdings, particularly if confidence in fiscal consolidation weakens, placing significant downward pressure on its reserves.
Ghana issued USD3 billion in Eurobonds in March 2021, and received USD1 billion in IMF Special Drawing Rights. The government had indicated plans to issue a further USD1 billion on international markets this year, but abandoned these plans in October, noting current market conditions.
The widening of Ghana’s spreads reflects growing international investor risk aversion, partly because markets now expect US monetary tightening to come sooner than previously anticipated, making it harder for vulnerable sovereigns to attract external financing.
Concerns about the government’s commitment to fiscal tightening, ahead of the release of the 2022 budget in November, may also have contributed to rising yields. Fitch already projects a more gradual improvement in the public finances than the 2021 budget’s medium-term framework, which saw the deficit falling to 5.5% of GDP by 2023.
We forecast the deficit, on a cash basis, to narrow to 7.7% of GDP in 2023 from 14% in 2020, with the general government debt/GDP ratio continuing to rise through 2022-2023, before plateauing in subsequent years below 90%.
The medium-term outlook for the public finances remains challenging, and problems have been exacerbated by the Covid-19 pandemic. Revenue is structurally low and interest costs very high – we project general government interest expense at almost 47% of revenue in 2022, well above the median for ‘B’ rated sovereigns of 11%.
The government’s current fiscal consolidation strategy offers a path to debt sustainability, but the gradual pace of deficit reduction leaves it vulnerable to slippage risk. This was reflected by our revision of the Outlook on the sovereign rating to Negative, from Stable, when we affirmed the rating at ‘B’ in June 2021. An insufficient pace of consolidation, failing to rebuild investor confidence, could result in a downgrade of the sovereign rating.
We estimate Ghana’s external debt-servicing costs will fall to USD2.2 billion in 2022, from USD3.2 billion in 2021, but forecast that a widening current-account deficit, combined with private debt payments, will mean a gross external financing requirement of USD7.3 billion. Consequently, external liquidity could become a source of increased credit stress if international capital markets remain too expensive for Ghana to issue in 2022.
The government has so far chosen not to pursue a regular IMF programme. However, we believe the authorities would ultimately opt to seek IMF financing if liquidity strains mount. The IMF classifies Ghana as being at high risk of debt distress, but we do not believe that an IMF programme would entail a debt restructuring. IMF support would bolster investor confidence, and could help Ghana regain access to international debt markets.
We believe that macroeconomic stresses and pressures on liquidity would probably intensify if Ghana remains unable to issue and does not seek timely support from the IMF. Around 20% of local-currency sovereign debt is held by non-residents, and under such a scenario these investors could lose confidence and sell down their holdings.
This could put downward pressure on the currency and force up the government’s borrowing costs. In June, we stated that a prolonged lack of market access leading to a sustained, sharp depreciation of the cedi or a decline in international reserves could be a driver of negative rating action.