FULL TEXT: Fitch Ratings downgrades Ghana's sovereign debt to 'Restrictive Default'

Fitch Ratings - Hong Kong - 21 Apr 2023: Fitch Ratings has downgraded Ghana's Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to 'RD' from 'CCC'. Fitch has also downgraded to 'CC' from 'CCC' and subsequently withdrawn the issue ratings on five local-currency bonds issued prior to the domestic debt exchange. Fitch has affirmed the issue rating of local-currency bonds issued on the completion date of the domestic debt exchange at 'CCC.'

Fitch has affirmed Ghana's Long-Term Foreign-Currency (LTFC) IDR at 'RD'.

Fitch typically does not assign Outlooks to sovereigns with a rating of 'CCC+' or below.

A full list of rating actions is at the end of this rating action commentary.

Fitch has withdrawn the ratings of five local currency-denominated bonds issued by the Republic of Ghana prior to the domestic debt exchange programme as they are no longer considered by Fitch to be relevant to the agency's coverage because Fitch no longer rates any local-currency bonds issued prior to the domestic debt exchange. Missed payments on some of the local-currency bonds issued prior to the domestic debt exchange could affect one or more of these five previously rated bonds. These five bonds are ISIN no. GHGGOG044744, GHGGOG066150, GHGGOG043563, GHGGOG065475, GHGGOG044751.

Key Rating Drivers

Missed Local-Currency Debt Payment: The downgrade of Ghana's LTLC IDR to 'RD' reflects the missed payments on some local-currency-denominated bonds that were not tendered or that are held by entities not eligible for participating in the domestic debt exchange.

The Republic of Ghana announced it was resuming payments on local-currency bonds issued prior to the domestic debt exchange (the 'old bonds') on 13 March 2023 to bondholders who were either ineligible or did not participate in the domestic debt exchange. However, the authorities have subsequently acknowledged that only the coupon payments on the two-year note that matured on 20 February 2023 and the 20-year note maturing in 2039 had been made. The principal payment on the former note has not been made.

Uncertainty Regarding Clearing of Missed Payments: Following a meeting with representatives of individual bondholders and pension funds, the government announced having reached an agreement on a pathway towards the settlement of the outstanding debt obligations by 28 April 2023. In Fitch's view, this announcement does not clarify whether missed payments will be settled to all categories of holders of 'old bonds' or only to these two categories.

According to Fitch, 35 payments, whether principal or coupon, were due on the outstanding 'old bonds' between 20 January 2023 and 20 April 2023. Fitch has downgraded to 'CC' from 'CCC' the issue rating of five local-currency bonds issued prior to the debt exchange and has subsequently withdrawn the rating on these securities due to the limited information and uncertainty regarding the timely servicing of the securities issued prior to the domestic debt exchange.

New Local-Currency Bonds Affirmed: Fitch has affirmed the 'CCC' issue rating of local-currency bonds issued on the completion date of the domestic debt exchange programme (the "new bonds") that was assigned on 22 March 2023. The first coupon payments on the new bonds are due in August 2023.

Solvency Concerns Remain Critical: The domestic debt exchange has increased the debt-to-GDP ratio by 0.6pp with payment-in-kind coupons corresponding to an increase in the face value of the new bonds compared with the face value of tendered bonds.

Despite a substantial redemption reprofiling and significantly lowered interest rates, Fitch estimates that the present value of public debt-to-GDP has been reduced by only 1pp to slightly above 100% of GDP (in present value terms) using the standard 5% discount rates that applies in the IMF/World Bank debt sustainability framework for low-income countries.

IMF support for Ghana will likely depend on the government's ability to show a path towards bringing the present value of debt to 55% of GDP over the forecast horizon on the basis of the IMF/World Bank debt sustainability analysis and the ability of official bilateral creditors to provide financing assurances in the context of the Common Framework external debt restructuring that authorities have requested.

Although discussion has started among some official creditors, the official creditor committee, responsible for providing the financing assurances, has not been created yet.

Fitch does not expect the provision of financing assurances, which will pave the way for an IMF Board approval of the ECF arrangement and for a new debt sustainability analysis to be published, before end of 2Q23.

Foreign-Currency Debt Remains in Default: Fitch downgraded the LTFC IDR to 'RD' from 'C' on 21 February 2023 following the expiration of the grace period for a missed Eurobond coupon payment.

This missed payment was consistent with the partial suspension on external debt payments announced by the government in December 2022. Ghana subsequently asked official creditors for a restructuring of its external debt under the G20 Common Framework.

Partially Guaranteed Notes Not Affected: Fitch downgraded the issue rating on Ghana's US dollar-denominated notes due October 2030 to 'CC' from 'B-' on 21 December 2022. The notes benefit from a partial credit guarantee backed by the International Development Association (IDA) for scheduled debt service payments up to 40% of the original principal, or USD400 million, representing 3.5 years of full interest payments.

The notes are part of the current external debt moratorium and at least the non-guaranteed part is likely to be included in the external debt restructuring. However, the IDA guarantee provides additional liquidity for debt service over the next 3.5 years, and could lead to higher recoveries.

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. 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 50.8 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.

ESG - Creditor rights: Ghana has an ESG Relevance Score (RS) of '5' for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The rating on Ghana's LTFC IDR reflects Fitch's view that Ghana is in default.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- The partially guaranteed notes could be downgraded depending on the evolution of the debt restructuring.

- The issue ratings on local-currency-denominated bonds issued on the completion date of the domestic date exchange would be downgraded in the event of increased risk that Ghana fails to honour the first coupon payments on these bonds due in August 2023.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Once Fitch receives satisfactory confirmation that Ghana has settled all the missed payments, the rating agency will assign Ghana's LTLC IDR based on a forward-looking assessment of its willingness and capacity to honour its local currency debt.

-Once Ghana reaches an agreement with private creditors on the restructuring of its foreign-currency-denominated debt and completes that restructuring process following the Common Framework official creditors' claims treatment, Fitch will assign a LTFC IDR based on a forward-looking assessment of its willingness and capacity to honour its foreign-currency debt;

-Evidence that the partially-guaranteed notes will be excluded from the external debt restructuring could lead to an upgrade of the issue rating on the partially guaranteed notes.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch's proprietary SRM assigns Ghana a score equivalent to a rating of 'CCC+' on the Long-Term Foreign-Currency IDR scale. However, in accordance with its rating criteria, Fitch's sovereign rating committee has not utilised the SRM and QO to explain the ratings in this instance. Ratings of 'CCC+' and below are instead guided by the rating definitions.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred 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.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure 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.

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.

ESG Considerations

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 therefore highly relevant to the rating and a key rating driver with a high weight. As Ghana has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

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. As Ghana has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.

Ghana has an ESG Relevance Score of '4[+]'for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Ghana has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Ghana has an ESG Relevance Score of '5' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Ghana, as for all sovereigns. The defaults on the foreign and local-currency denominated debt reflected in the LTFC and LTLC IDRs at 'RD' has a negative impact on the credit profile.

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).