KEY RATING DRIVERS
The affirmation of the ‘B’ rating reflects Fitch’s expectation of a swift recovery after the coronavirus pandemic shock and the availability of additional fiscal and external financing options to the sovereign. This is balanced against the risk that a deeper and longer economic shock will result in worsening fiscal and external debt metrics.
The coronavirus crisis will cause a shock to Ghana’s near-term growth and fiscal outturns. Public finances are already a ratings weakness, as Ghana has a track record of fiscal slippage around elections and deficiencies in public financial management (PFM) that weakened the government’s ability to meet fiscal targets. In the years following the 2016 election, the government passed the Fiscal Responsibility Act, which caps the targeted fiscal deficit at 5% of GDP, along with a number of PFM reforms, which helped lower government deficits on a commitment basis. Fitch now forecasts the general government cash deficit to widen from an estimated 7.6% of GDP in 2019 to above 10% in 2020. The 2020 cash deficit includes approximately 2.8% of GDP in arrears clearance and the realisation of contingent liabilities from the financial and energy sectors. We expect that the fiscal deficit will narrow in 2021, supported by stronger growth and fewer materialising contingent liabilities. However, the December 2020 elections heighten risks of additional fiscal slippage this year and of possible post-election reversal of the 5% deficit cap and PFM reforms.
Fitch estimates Ghana’s total 2020 financing requirement, including debt amortisation, at approximately GHS78 billion or 21% of GDP. The issuance of USD3 billion (4.9% of GDP) in Eurobonds in January 2020, before the COVID-19 crisis effectively shut many emerging markets out of international capital markets, allowed the government to meet a significant portion of its financing needs. The widening of the fiscal deficit will mean that the financing requirement will be approximately 3% of GDP higher than what was programmed in the 2020 budget. To meet the extra financing needs, Ghana has come to agreement with the IMF on a Rapid Credit Facility that will disburse USD1 billion (1.6% of GDP) and the government expects an additional USD300 million (0.5% of GDP) from the World Bank. The authorities also plan to draw on approximately USD200 million (0.3% of GDP) in deposits from Ghana’s Petroleum Funds. The remainder of the financing needs will likely come by increasing the government’s call on the domestic debt market.
If the fiscal deficit widens further than we currently expect, we believe that the government will be able to access additional financing from international financial institutions and draw further on its petroleum funds, which currently have a balance of just below USD1 billion (1.6% of GDP). The government has also considered amending the Bank of Ghana Act to allow direct borrowing from the Bank of Ghana up to 10% of the previous year’s revenue, which equals GHS5.3 billion (1.6% of GDP). The law allows direct financing of up to 5% of the previous year’s revenue but the government currently has no outstanding balance to the central bank.
Fitch expects fiscal outturns to improve over the medium term, but high general government debt will remain a constraint on the ratings. Fitch forecasts general government debt to increase to 76.8% of GDP in 2020, owing to the combination of a wider fiscal deficit and cedi depreciation. Debt would equal 535% of government revenue, twice the ‘B’ median of 214%. Furthermore, cedi depreciation has increased external debt servicing costs in local-currency terms and we forecast interest costs to reach 40.3% of revenue compared with the ‘B’ median of 8.6%. We expect government debt to plateau in 2022, although there is a risk of larger-than-expected contingent liabilities from the energy sector.
Fitch forecasts Ghana’s GDP growth to fall to 2% in 2020, but there is material downside risk to this forecast depending on the extent and duration of the coronavirus outbreak and the resulting lockdown measures. The current lockdown in Ghana’s two largest cities of Accra and Kumasi will lead to much slower growth in manufacturing and services, but agriculture and the extractive sectors are likely to fare better. Since the commodity price collapse in 2015, Ghana’s economy has been powered by high growth in the oil sector, but modest growth in non-oil sector. We expect a relatively robust recovery to 5% in 2021, as oil production recovers gradually from an expected fall in 2020 and non-oil growth continues its recovery. The possibility of bringing new oil and gas reserves into production brings some upside risk in the long term, but we expect that Ghana’s oil sector development will slow in response to the collapse of oil prices.
The fall in oil export receipts, along with lower tourism receipts and remittances will lead to widening of the current account (CA) in 2020. However, the widening will be contained by the fact that Ghana’s other key exports, gold and cocoa, are not correlated with the price of oil. Fitch forecasts the CA deficit to widen to 4% of GDP, up from 2.9% in 2019. The expected increase in external debt disbursements will support Ghana’s official international reserves position, as will the flexibility of the cedi. However, increased borrowing will take net external debt to 46.1% of GDP, well above the current ‘B’ median of 17.6%.
The government will continue to realise contingent liabilities from Ghana’s banking sector in 2020 from the financial sector clean-up. The ratio of non-performing loans (NPL) to total loans fell to 13.9% at end-2019 from 18.2% in the previous year. We expect the NPL ratio to remain elevated in 2020 as a result of economic challenges, but bad loans in the energy sector will continue being cleared slowly through the Energy Sector Recovery Programme (ESRP). Real private sector credit growth increased to 15.2% yoy in January 2020, from 8.4% at end-2018, but we expect a sharp reduction for the rest of the year as the economy slows. Increased government borrowing requirements will also lead to some crowding out of private sector credit provision.
ESG – Governance: Ghana has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Ghana has a medium WBGI ranking at the 54th percentile, reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Ghana a score equivalent to a rating of ‘B+’ on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
– Public Finances: -1 notch, to reflect high government debt and interest burden relative to revenue and an uncertain level of contingent liabilities to the sovereign from the energy sector.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centered averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that could, individually or collectively, lead to positive rating action/upgrade are:
– Greater confidence in the government’s ability to maintain a disciplined fiscal stance through an electoral cycle and against the backdrop of slowing growth in 2020.
– An improvement in Ghana’s external liquidity, such as an increase in international reserves occurring through non debt-creating flows.
The main factors that could, individually or collectively, lead to negative rating action/downgrade:
– Worsening of public finance metrics relative to our base case scenario, for example due to failure to implement a credible consolidation strategy post-pandemic shock and following the 2020 elections.
– A decline in international reserves, for example as a result of a prolonged lack of access to international capital markets.
– A deeper near-term macroeconomic shock or a sustained increase in macroeconomic instability, for example due to longer-than-expected lockdown measures and/or prolonged fiscal slippage.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Public Finance issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Fitch expects global indicators, including oil prices, to move in line with Fitch’s Global Economic Outlook forecasts.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Ghana has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are highly relevant to the rating and a key rating driver with a high weight.
Ghana has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Ghana has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as strong social stability and voice and accountability are reflected in the World Bank Governance Indicators that have the highest weight in the SRM. They are relevant to the rating and a rating driver.
Ghana has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver Ghana as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
Source: Fitch Ratings