On Friday, 5th August, rating agency Standard & Poor’s has just lowered Ghana’s rating from B- to CCC+. This means that the country has a “high risk” of not being able to repay its debts and, therefore, of defaulting. The decision of the American rating agency – the first in the world – comes a month after the IMF delegation visited Accra to start negotiating a financial aid programme. This is the 17th time Ghana has turned to the international financial institution to get help since independence in 1957.
The drop in S&P’s confidence in Ghana’s ability to meet its sovereign debt obligations is a strong red flag on the country’s economic sustainability, as The Economist predicted in one of its articles on August 5th.
Is debt default at the corner ?
As the crisis worsens, it is becoming more challenging to reduce its budget deficit and thus balance its debt, as the cost of borrowing is rising faster than economic growth. Ghana, with a debt ratio of 81.8% of GDP at the end of 2021 (approx USD 40.6 billion) and an interest expense ratio of 7.2% (the second highest in the world just behind Egypt), is close to default.
It is ranked number 2, just after El Salvador, on the 2022 list of countries at risk of default. This makes Ghana the first African country in the list. This news becomes more frightening as we know that it is the second-biggest economic power among ECOWAS countries. According to Visual Capitalists, Tunisia and Egypt are the next African countries with the highest risk of default. Among the countries that have been unable to pay their debts since 2020 are Russia, Sri Lanka, Lebanon, Belize, Ecuador, Zambia and Suriname.
And the downfall continues
S&P is the third agency to downgrade Ghana’s rating since early 2022. In February, Moody’s lowered the country’s rating to CAA1. A month earlier, it was Fitch Ratings that lowered its grade from B to B-. On 8 August, the Ministry of Finance issued a statement regarding the most recent ratings downgrade. The government argues that the policies implemented throughout the year are suffering from external factors that impact Ghanaian economy greatly: “The government is disappointed by S&P’s decision to downgrade Ghana despite the bold policies implemented in 2022 to address macro fiscal challenges and debt sustainability”.
These downgrades did not happen overnight. Indeed, years of reckless management of public finances have led Ghana to its downfall. Despite repeated warnings from the World Bank and the IMF during the 2022 spring meetings, the country continued its policy of excessive borrowing on the markets. This led to a much higher debt burden than its neighbours and to the situation we see today. For example, Cote d’Ivoire’s debt is only 52% of GDP.
The government had no choice but to turn to the IMF to find a solution and get out of the financial mess it is in.
Will the IMF be able to save Ghana ?
In the wake of the IMF’s visit to Accra in July, a member of the finance committee said that the financial institution and Ghana could sign an agreement in the first quarter of 2023. However, there is no guarantee that the IMF will grant its aid programme. Indeed, the financial institution is deeply concerned about the amount of Ghanaian debt and will conduct a thorough analysis before agreeing to a deal.
Moreover, it is not certain that the aid programme will bear fruit. It should be kept in mind that the economic stagnation in which Ghana finds itself is mainly due to the mismanagement of the country’s finances. The issue of corruption at the highest levels of government is also of concern to the IMF, which will monitor this closely. It will be necessary during the next 8 months before the deal to pay particular attention to reassuring the markets in order to maintain the flow of foreign direct investment and to mobilize private sector actors while taking action to limit the risk of corruption.