Moody’s downgrades Ghana’s economy and puts it under scrutiny

(Ecofin Agency) – Ghana’s debt could increase by 26% to 104% of GDP this year – due in particular to a sharp depreciation of the Cedi, which is currently one of the worst performing currencies in the world. In addition, there are news reports of a new economic program being negotiated with the IMF. From this perspective, the main fear now conveyed by Moody’s and similar rating agencies is the idea of ​​debt restructuring, which they equate with default.

After Fitch, Moody’s also downgraded Ghana’s credit rating, fearing a public debt restructuring as the country entered advanced talks with the IMF, its last chance to contain runaway inflation which is badly affecting the Cedi. the national currency.

Fearing that the ongoing negotiations between the government and the IMF might lead to a financing program that would include a request for the restructuring of the public debt, the rating agency decided to lower the long-term issuer rating and the senior unsecured debt from Caa1 to Caa2 (highly speculative category). The agency warned that the country had been placed “in review for downgrading”.

“Such a restructuring would likely be considered a distressed stock exchange and therefore a default under the rating agency’s definition.“, explained Moody’s whose rating actions (as well as those of its peers) are increasingly contested in Africa.

Ghana is currently facing a major macroeconomic crisis. To deal with this crisis, the government is negotiating an economic program with the IMF to “restore its credibility” with its partners, investors in particular.

For Moody’s, “The downgrade to Caa2 reflects the recent macroeconomic deterioration, further exacerbating the government’s liquidity and debt sustainability challenges and increasing the risk of default.”

The government has recently tightened monetary policy in response to global shocks. However, inflation continues to rise, sending the local currency to its lowest levels. In August 2022, the country’s inflation was 34%, the highest since July 2001. The Ghana cedi lost 40% of its value against the US dollar between January and August 2022, becoming the second worst performing currency in the world. In the past three months alone, the Ghanaian currency has lost nearly 21% of its value against the US dollar.

The decline undoubtedly affects the price level as the country is a major importer. It is one of the ten world economies most affected by inflation. Neither central bank rate hikes nor fiscal measures were able to slow the rise in prices.

Together, a sharp rise in interest rates, high inflation and a rapidly weakening currency exacerbate the government’s debt problems. Without external support, the government’s political levers to stem the deterioration of the macroeconomic context and the increase in the debt burden are extremely limited; the government’s weak revenue base, largely and increasingly absorbed by interest payments, further intensifies the political dilemma between competing objectives, including servicing the debt while meeting basic social needs“, explains Moody’s.

The US agency goes so far as to believe that Ghana is on the verge of default, even though the country has not defaulted on its bonds and loans since 1983.

Rising government borrowing costs have rapidly increased its interest expenditure, which has consumed nearly half of government revenue in 2021, a proportion Moody’s expects to reach 58% in 2022, one of the highest raised in the world […] Given that foreign currency-denominated debt represented 37% of GDP at the end of 2021, Moody’s projects that currency depreciation over 2022 will be the main contributor to the increase in the debt-to-GDP ratio this year to more than 100% of GDP. ,“he adds.

Carriage E. Kakpo

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