Vice President Dr. Mahamudu Bawumia
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.
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