Ghana’s Sovereign Rating Drops To B3

Ghana’s sovereign rating has been lowered one step to B3, Moody’s said on Thursday. Moody’s cited the country’s increasing debt burden as a result of large fiscal imbalances, sharp weakening of the Ghana cedi, reduced debt affordability as some of the main reasons for the downgrade.

The international rating downgraded Ghana’s rating after Finance Minister Seth Terkper announced the adverse effects of the low crude oil prices on Ghana in a revised budget for 2015.

It said government faces large gross borrowing requirements amid more difficult domestic and external funding conditions which all present a negative outlook.

According to Moody’s, the aforementioned pose further risk to the country’s debt dynamics and liquidity pressure in the short-term, especially if the country’s policies fail to successfully contain its fiscal deficit, stabilize its currency and address current impediments to higher economic growth.

Concurrently, Moody’s has changed the foreign-currency bond ceiling to Ba2 from Ba3 and the foreign currency deposit ceiling to Caa1 from B3.

Moody’s has also changed the local currency bond and deposit country ceilings to Ba3 from Ba2.

The rating agency also noted that limited fiscal and external buffers in the face of tighter US dollar liquidity, economic headwinds and terms of trade shocks increase the risk for these adverse debt dynamics to persist. Comment on IMF deal

Moody’s said the main focus under the three-year IMF programme (recently agreed at staff level pending IMF board approval expected in April) is fiscal consolidation via expenditure control and increased tax collection, building on the budgetary measures implemented in the 2015 budget.

However, it added that such fiscal consolidation effort will take place in the context of a slow growth environment which dampens revenue generation capacity.

‘The growth slowdown is being exacerbated by a significant power shortage currently amounting to almost a third of peak demand.’

It said a more muted fiscal consolidation path over the next two years than envisioned by the government in view of significant investment is needed to resolve the power crisis, in addition to the election cycle in 2016 which has historically coincided with expenditure overruns.

Second cause
The second driver of the downgrade reflects increased government liquidity risk in view of large gross borrowing requirements amid difficult domestic and external funding conditions.

In particular, higher prevailing risk premiums than in october 2014 during Ghana’s most recent Eurobond issuance add to the challenges of returning to the international markets ahead of the $530 million Eurobond maturing in 2017, notwithstanding the establishment of a Sinking Fund, which is aimed at assisting with future debt repayments.

On the domestic side, large domestic rollover needs and a front-loaded issuance calendar have driven interest rates to over 26% in the short-term Tbill segment.

The IMF programme also reduces the scope for Central Bank support in financing the current year fiscal deficit.

Moody’s noted that balance of payments risks are partially mitigated by the $940 million iMF programme (equivalent to 2.4% of GDP).

According to the revised 2015 budget, lower oil prices will cost the government revenues of about 2 percentage points of GDP.

At the same time, Moody’s expects sufficient foreign direct investment and other capital flows to fund most of the anticipated large current account deficit this year and in 2016.

BY Samuel Boadi

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