Ghana’s Worst Downgrade: The Blissful Ignorance and Pompous Arrogance of a Government Holding on to Straws

 

Ghana suffered its worst credit rating downgrade post-HIPC/MDRI this year when Fitch Ratings and Moody’s Investor Services cut the country’s score to B negative and Caa1 respectively in mid-January and early February respectively. The latest rating puts the country in the ‘red zone’ of the scale used by rating agencies to assess the credit worthiness of sovereigns across the globe. It now means that Ghana’s debts are, for the first time since the 2000s, considered highly speculative and substantially risky by investors and analysts. In other words, Ghana’s debts are seen as junk by investors.

This gloomy verdict on an economy that the World Bank, the International Monetary Fund (IMF), the African Development Bank and several other international and regional institutions of repute had tipped to be the shinning star of Africa from 2017 onwards is heart-wrecking and shocking. It is more so because long before the rating agencies passed their verdict, Ghana was already downgraded by the capital market.

This happened when they started dumping our bonds at a high yield. In reality, our bonds became junk when we crossed the 10% yield mark and actually traded at 15% around November last year. To put it into proper perspective, Ghana’s Eurobonds issued at par value of $100 with the fanfare since 2018, with the last one issued to raise $3 billion only a year ago, started selling at a discount of $80 per bond, signaling fears of risk of default by investors associated with our ability to pay them.

The investors became even more alarmed after the 2022 budget was presented to Parliament with widespread lack of credible policies to tame expenditure and grow revenues for the deficit, debt build up and the associated impact on interest payments to fall. In the eyes of investors, the budget simply lacked confidence in the ability of government to turn the economy around in the short to medium term.

As a result, investors started demanding massive risk premium across all our bonds with our bonds selling at 15% yield at bid prices as low as $70 per bond of $100 par value. This magnified the concerns of investors about the health of the economy.

In the domestic capital market, our cedi-denominated bonds were selling at even ridiculous rates with unsustainable yields. For example, a popular bank in the country, which has been a darling of this Government, went at all lengths to accept a bid of GHC4 million for bonds with par value of GHC5.6 million.

Domestic bond default, rollover risks and credit crunch

Ghana’s domestic fixed income market has been rattled with both domestic and non-resident investors instructing their fund managers and brokers not to put their monies in Government of Ghana bonds and securities. As Government began to default on its maturing domestic bonds with widespread spurious bond restructuring and rollovers, the liquidity crunch in the market became pronounced with several inquests in a number of foreign banks to understand and place responsibility on risk managers for not providing the requisite surveillance on Ghana’s disastrous, economy leading to huge impairment of their bonds held with Government.

All this while, rating agencies were failing the markets by delaying their signaling of Ghana’s deteriorating creditworthiness and grim economic outlook.

In fact, the Government of Ghana appears a little lucky to the extent that the rating agencies have been late in reporting Ghana’s junk classification, which the markets knew, anyway, and were battling with. Essentially, Fitch, Moody’s and Standard & Poor’s (S&P) are only now catching up with confirmation of the verdicts of and predicaments of investors on Ghana’s substantial risks and bleak economic outlook.

It is, therefore, an unprecedented mockery to see the Finance Ministry and its team line up behind the President to attack the rating agencies. It is the sheer display of ignorance and arrogance by a country holding on to straws in turbulent waters.

Of all the claims made against the agencies, the funniest is the attempt to dismiss the work of Moody’s with the claim that the Lead Analyst to Ghana has not visited Ghana since her appointment last January. As a result, it classified the work as a desktop exercise.

So, Ghana Government wanted the rating agencies to visit Ghana and hold meetings with officials before issuing their report? The point is, all the data about Ghana that the rating agencies need to do the risk assessment is already with them. The same or enhanced one is also with the IMF, the World Bank and International Capital Market players. That is why no rating agency comes to hold meetings with government officials before issuing reports. Mind you, we are not talking about the cooked and procured data and reports from the Ministry of Finance that the IMF and other institutions of repute have discredited.

Confusion over positive outlook

Again, who says if a country has a stable or positive economic outlook, it cannot have a negative issuer rating? The issuer rating is about your ability to pay your maturing debt obligations. Simple! This has nothing to do with the growth prospects, political stability and medium-to-long term fiscal, economic and monetary trajectory, which the outlook considers.

For the abundance of clarity and the avoidance of doubt, the rating of Caa1 is a reflection of Ghana’s acute liquidity crunch and distressed credit worthiness. How can anyone be disagreeing in the abundance of evidence, which actually point to a worse position than we are made to believe?

To be able to meet maturing debt obligations, a country must either have buffers such as a sinking fund or balances in Government accounts earmarked for it or ability to borrow to switch or refinance maturing debt. For example, in 2016, H.E John Dramani Mahama anticipated that H.E John Agyekum Kuffour’s 2007 Eurobonds would mature in 2017. He, therefore, saved about $500 million in a sinking fund to be used to retire the Kuffour Eurobonds.

The question to this government and its army of obliging communicators fighting the rating agencies is: Do we have anything in the sinking today to pay off our maturing debt?

Akufo-Addo and Bawumia have so badly mismanaged the economy such that they do not have buffers to draw down to pay our maturing debt. Yet, the capital markets where they have borrowed from with alacrity to refinance the debt has been shut on us. Ghana’s Bonds are now like a bubonic plaque that no one wants to touch.

So, quiet clearly, the country faces substantial risks of default in the market almost to the point of a debt-distressed economy. Indeed, Ghana is already defaulting on its domestic bonds, with spurious restructuring and rollovers since the third quarter of 2021. The only thing left is for the government to extend this default to the government’s international capital market obligations.

Investors have long sensed it and are only willing to take the bonds by pricing them very high by factoring in the unsustainable risks premium. All the rating agencies agree with the sentiments of investors that place you in the danger zone and junk category and you say you disagree?

This fight is like a man with weak muscles flexing them and punching the air to show how strong he is before his wife and children. The government is just two steps away from being declared a non-existent economy with no standards applicable to its situation for rating.

To put it in much simpler terms, the rating agencies have looked at all the positive sides of Ghana’s economy, evidenced by rebounding of growth from the 0.4% recorded in 2020 and the stable democratic governance but are still worried by Ghana’s worsening fiscal developments as the government is unable to finance compensation and interest payments from its total revenue without borrowing to supplement it (negative primary balance).

Specifically, even if the government was to spend all its revenues, including statutory funds meant for Common Fund, GETFund and NHIA, it would still not be able to pay workers and interest payments without borrowing. Under the current circumstance, the government is unable to have anything left to pay statutory obligations, including the Common Fund, which has been in arrears for a full year. This is the diagnosed ailment of the economy managed by the all-knowing Dr Bawumia, the man the NPP presented as the Jesus of Ghana’s economic problems only for him to come and resign himself to ICT.

Lack of confidence

Instructively, the rating agencies and investors do not also have confidence in the government’s 2022 Budget and its deceptive promise to cut expenditure by 20%. The evidence suggest that the government has so much fiscal rigidities in its expenditure framework such that in addition to compensation, interest payments and 50% of its goods and service (free SHS), it basically has to borrow just to deal with these rigidities alone and have nothing for capital expenditure.

These matters of the economy were assessed by Fitch to deliver a negative economic outlook in addition to constrained ability to pay thee debts. This is supported by Moody’s, except to say Moody’s was sympathetic enough to give the country a stable outlook. The situation is dire and no sloppy PR will paint over a disastrously mismanaged economy.

I have read the so called challenge of Moody’s rating and claims that their analyst never came to Ghana and therefore did a desktop analysis.

My only advise to you is that there is “no remarking in economic ratings”. Also, economic management and its resulting ratings are not subject to ‘multilateral diplomatic negotiations’ as is being undertaken through the African Peer Review Mechanism (APRM).

I will humbly advise the government, led by Akufo-Addo and once parroting but now silenced Bawumia to stop the continuous international embarrassment and get to work on the difficult task of fixing the economy. It is not too late to drop the arrogance and seek help from abundant expertise within and without the country to save the economy from eminent collapse.

As H. E. John Dramani Mahama has said, time is ticking and the time to act is now. No one is willing to give you the benefit of the doubt anymore. After giving you such a long rope, it has become clear the Akufo-Addo-Bawumia government are “dubious financial engineers” and scammers led by the white-wearing, Bible quoting Ken Ofori-Atta.

By Hon Isaac Adongo