Moody’s downgrades Ghana’s sovereign rating

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Moody’s Investors Service downgraded Ghana’s sove-reign rating and put the country on a negative outlook to reflect an increasing debt burden, large fiscal imbalances and a sharp weakening of the cedi currency.

The downgrade by one notch to B3 from B2 comes despite an agreement with the International Monetary Fund in February for a three-year $940 million financial assistance programme, designed to restore fiscal stability.

The grading released by Moody’s on Friday cited Ghana’s deteriorating debt dynamics, as reflected by an increasing debt burden due to large fiscal imbalances and a sharp weakening of the country’s national currency, combined with reduced debt affordability stemming  from a high cost of funding in the domestic market, as the reasons for the downgrade.

“The negative outlook reflects further downside risk to the country’s debt dynamics and liquidity pressure in the short-term if the country’s policies fail to successfully contain its fiscal deficit, stabilise its currency and address current impediments to higher economic growth,” it said.

Concurrently, Moody’s changed Ghana’s 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.

RATIONALE FOR DOWNGRADE TO B3

According to the ratings agency, the first driver of the downgrade was Ghana’s deteriorating fiscal strength as reflected in the significant increase in the government debt ratio to an estimated 67.2 per cent of Gross Domestic Product (GDP) in 2014 from 54.8 per cent in 2013, driven by the large fiscal deficit at 9.4 per cent in 2014, and adverse debt dynamics fueled by high domestic interest rates and currency depreciation against the US dollar.

“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,” it said.

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

It however, stated “ this fiscal consolidation effort will take place in the context of a slow growth environment which dampens revenue generation capacity.”

Ghana’s debt affordability is already among the weakest in Moody’s rated universe, with annual interest payments amounting to about one third of revenues in 2014.

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

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

The second driver of the downgrade reflects increased government liquidity risk in view of large gross borrowing requirements amid more 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 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 per cent in the short-term T-bill segment.

By Times Reporter

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