Global Credit Research – 27 Jun 2014
New York, June 27, 2014 — Moody’s Investors Service has today downgraded Ghana’s sovereign rating by one notch to B2 from B1. The outlook on the rating is negative.
The key drivers of today’s rating action are the following:
1) Ghana’s deteriorating fiscal strength, as reflected in the rising debt level and worsening debt affordability amid persistently high fiscal deficits.
2) The increase in Ghana’s vulnerability to shocks given its large debt-refinancing needs and wide external imbalances
Concurrently, Moody’s has changed the foreign-currency bond ceiling to Ba3 from Ba2 and the foreign-currency deposit ceiling to B3 from B2. The local currency bond and deposit country ceilings remain unchanged at Ba2.
The primary driver of Moody’s decision to downgrade Ghana’s sovereign rating to B2 is the country’s high and rising debt burden and deteriorating debt affordability. The rating agency expects public debt to exceed 65% of GDP by the end of 2015 from 55.7% in 2013, mirrored by rising interest expenses relative to government revenues.
Persistently high fiscal deficits are the main cause of the increasing debt ratio. Moreover, Moody’s anticipates that any fiscal consolidation from double-digit deficits will be slow over the forecast horizon in view of rising interest payments, the clearance of arrears, and the elections scheduled for 2016 (i.e., expenditure and the electoral cycle are highly correlated). These factors counteract the revenue-enhancing measures introduced by the government in 2013 and constrain the effectiveness of the government’s efforts to reduce the wage bill as a percentage of tax revenues to 35% by 2017 from above 50% at present.
Similarly, interest payments have increased significantly over the past year to 23% of revenues in 2013 from 14% in 2012, which places Ghana in the 95th percentile among all rated sovereigns by Moody’s on this metric of fiscal stress. Interest payments have continued to rise during the first quarter of 2014, reflecting the high rates on domestic debt. Domestic debt accounted for slightly less than 50% of total public debt at the end of the first quarter of 2014, about one third of which is of short maturity.
The second driver behind the downgrade is Ghana’s increased susceptibility to event risk, particularly liquidity risk in light of the government’s large debt financing needs. At the same time, the double-digit current account deficit, only part of which is financed by net foreign direct investment inflows, leaves Ghana vulnerable to a sudden stop in international capital flows. The strong pressure on the Ghanaian cedi from the weak overall balance of payments position, and from above target inflation at 14.8% as of May 2014, is mirrored by a declining stock of international reserves to low levels. Gross international reserves at the central bank at the end of the first quarter of 2014 represented 2.7 months of import cover.
At the same time, the Central Bank of Ghana has monetized the fiscal deficit in the first quarter of 2014 — a period when revenues are seasonally weak — resulting in a higher exposure than the full-year equivalent in 2012 or in 2013. In view of falling foreign investor engagement in domestic debt since September 2013 through March 2014, and an already high government exposure of the domestic banking system, Moody’s notes an increased risk of domestic funding pressures once the central bank scales back its funding activities over the remainder of the year. Fiscal monetization is also likely to exacerbate inflationary pressures.
Moody’s views the expected completion of the Jubilee field gas pipeline infrastructure over the coming months as a mitigating factor to the extent that domestic gas production allows for import substitution and contributes to strengthening Ghana’s energy capacity over the medium term. This should sustain the economy’s competitiveness and growth potential, and reduce the import bill and associated current account exposure. Similarly, in its central case, Moody’s also expects oil production to reach full capacity over the next few years, royalties from which would further support the government’s relatively low revenue share as a proportion of GDP as compared to peers.
RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK
The negative outlook reflects the risk of (1) sustained fiscal imbalances over the medium term to result in a greater than anticipated deterioration in debt metrics; (2) a continuing decline in foreign-exchange reserves that increases Ghana’s vulnerability to external shocks; as well as (3) tight domestic and external funding conditions that exacerbate the government’s funding challenges.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Downward pressure on the rating could arise from factors that include (1) continued delays in fiscal consolidation; (2) a sustained decline in oil, gold or cocoa prices that would put downward pressure on fiscal revenues and export receipts; (3) diminished access to foreign investment or portfolio capital or loss of market access; (4) continued pressure on the balance of payments and on international reserves.
A return to a stable outlook on Ghana’s sovereign rating could occur as a result of: (1) accelerated and sustained fiscal consolidation that would gradually reduce the government’s debt burden over the medium term; (2) a strengthening of FDI inflows as a source of funding for the country’s large infrastructure investment needs; (3) a substantial bolstering of Ghana’s foreign-exchange and/or fiscal reserves that would reduce the country’s vulnerability to domestic or external shocks. An external financial assistance program, such as an IMF program, would also be supportive of creditworthiness.
GDP per capita (PPP basis, US$): 3,461 (2013 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 7.1% (2013 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 15.3% (2013 Actual)
Gen. Gov. Financial Balance/GDP: -10.1% (2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -11.9% (2013 Actual) (also known as External Balance)
External debt/GDP: 30.3% (2013 Forecast)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 25 June 2014, a rating committee was called to discuss the rating of the Ghana, Government of. The main points raised during the discussion were: The issuer’s governance and/or management, have materially decreased.
The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating.
For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review
Elisa Parisi Capone, Moody Analyst…
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