On June 22, Fitch Ratings revised its outlook downwards on Ghana’s long-term foreign-currency issuer default rating of B to negative, from stable. The ratings service cited “significant deterioration in public finances” due to Covid-19, delays to the government’s fiscal consolidation efforts and increased risk of fiscal slippage due to the lack of a clear government majority in parliament.
The risk of further rating downgrades for Ghana is “likely to rise over the next year” as the government will continue to borrow heavily in the domestic market, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London.
Ghana faces a sharp rise in domestic bond redemptions in the second half of this year and “inability to hit fiscal deficit targets is likely to impair external borrowing options” in 2022, Bohlund says.
The limited improvement in debt-servicing ratios since 2020 is likely to trigger downgrades from at least two of three major rating agencies by the end of 2022, he adds.
Ghana has resources that could help to pull it away from trouble, according to research from S&P Global Ratings in June. Its diversified commodity base of gold, oil and cocoa has helped it to weather volatile international commodity prices.
- “We expect these offsetting trends to continue in the medium term,” S&P says.
- Still, S&P estimates that at least 60% of total government debt is external, with at least 50% denominated in a foreign currency, making debt-service costs sensitive to the cedi’s depreciation.
- The government is using about half of its fiscal revenue to service its debt, and GDP per head is only slightly above $2,000, S&P says.
REDD Intelligence’s Bohlund says he sees no easy solutions for Ghana’s banks. Nigerian banks that have expanded across Africa have been able to reduce their dependence on their home market, but “but Ghanaian banks do not have the capital required for such forays,” he says.
He adds: “A sovereign downgrade could require capital injections into some banks to shore up their capital adequacy ratios.”
The operating units of Nigerian banks in Ghana may be first in line. Fitch also revised the default-rating outlooks for Guaranty Trust Bank Ghana (GTBG) and United Bank for Africa Ghana (UBAG) to negative from stable on 30 June.
In the event of a sovereign default, Fitch says it is “unlikely” the Ghanaian units would remain solvent due to their high exposure to Ghana’s government securities.
Neither bank has a high market share in Ghana, which compounds their exposure to government debt, says Michael Ogunremi, macroeconomic and fixed income analyst at Chapel Hill Denham in Lagos.
Nigerian banks see strong growth prospects in Ghana and will want to stay there unless there is “extreme” economic stress, argues Ogunremi.
- A debt downgrade would increase the risk of GTBG and UBAG needing capital injections from their Nigerian parent banks, he adds.
- The country’s top banks – such as GCB, Nigeria’s Zenith and Togo’s Ecobank – in contrast, have “shock absorbers” that would allow them to withstand a sovereign downgrade, Ogunremi says.
- For now, Ogunremi says, GTBG and UBAG need to reschedule Ghanaian government debt and pay it off to allow them to diversify their loan portfolios in the country.
Ghana’s worsening debt outlook will test the resolve of Nigerian banks to tough it out.
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