Implications of Fitch downgrading Ghana

The downgrade of Ghana’s credit rating by Fitch may not have come as surprise to the Government of Ghana, however, it has wider implications for the country and for businesses as well.

First of all, Ghana’s credit ratings have become topical since the country begun to borrow on the international market. In 2007, the country issued its first bond on the international market raising some $750 million with a 10 year maturity period at an interest of 8.5%.

Its second bond, the Eurobond, was issued in July 2013 and targeted $1 billion, but was oversubscribed by 120%. The Eurobond was also listed on the Ghana Stock Exchange after already listing on the Dublin Stock Exchange, becoming the first African country to list its bond on the domestic bourse.

These bonds were raised to finance long-term capital component of the budget. This notwithstanding, there remain little clarity about the infrastructural projects that were financed with the proceeds of the first bond. Moreover, Ghana has been spurred by increasing oil production to increase borrowing both domestically and internationally. Most of the funds borrowed have been spent around elections period, where government expenditure are motivated. According to the Minister of Finance and Economic Planning, $340 million of the Eurobond would be used to refinance domestic debt.

Successful as these bond subscriptions have been, Ghana’s economy is not performing well. More critically, 70% of domestic revenues generated have been spent on a ballooning public sector wage bill expected to reach GH¢11 billion by the end of the year. And that is not all, government revenue generation targets are not within reach. The country’s budget deficit has almost tripled from 4% in 2011 to 11.8% in 2012.

Impact on the country

For Ghana, a downgrade in credit rating from B+ to B means its ability to borrow on the international market may be curtailed. It may not be able to raise capital on the international markets as it did earlier or it may do so at higher cost. This could be fatal for a low-middle income country like Ghana which needs to diversify from donor funds and grants as major source of financing for development. Already, Ghana’s domestic debt is high-at 48% of total government debt. The perception of lenders is that Ghana may not be able to repay their bonds when it matures.

The second implication for the economy is one of policy credibility. As stated by the Fitch in their statement on the downgrading “policy credibility has been significantly weakened, following two years of larger-than-expected budget deficits.” Policy credibility is important when it comes to assessing how government agents’ actions in light of economic constraints and whether they will implement announced policy. Again this is important to lenders, both domestic and international who may perceive the government as likely to renege on repaying financial commitments. In this case, the credibility of Ghana’s political and economic leadership have been put into question for failing to rein-in the deficit two years in a row.

The third implication for the country is that, a lower credit rating can affect the country’s ability to attract foreign direct investments. As credit ratings also measure political risk, investors are averse to countries with high political risk. This may not be applicable to Ghana, however, a further downgrade may give signals to investors about the macroeconomic and political environment of the country.

Impact on businesses

If borrowing internationally becomes a challenge for a government with downgraded ratings, it may resort to domestic borrowing. This may crowd out credit to the private sector as governments are attractive to domestic banks than businesses. This would also imply a high interest rate for businesses who may want to borrow. Already interest rates can be as high at 40% depending on the sector a business operates in. Though, Ghana’s domestic debt is high, it may likely increase in the short term before declining.

By Dode Seidu

An International Trade & Investment Consultant at TradeGap
[email protected]