The American rating agency, Fitch, has forecast that the Akufo-Addo government’s next logical step will be to run to the International Monetary Fund (IMF) for a bailout after messing up the country’s finances.
The expectation was contained in a November 1 forecast by Fitch Ratings Hong Kong
“The government has so far chosen not to pursue a regular IMF programme. However, we believe the authorities would ultimately opt to seek IMF financing if liquidity strains mount. The IMF classifies Ghana as being at high risk of debt distress, but we do not believe that an IMF programme would entail a debt restructuring. IMF support would bolster investor confidence, and could help Ghana regain access to international debt markets,” Fitch diagnosed.
The rating agency added that Ghana is likely to run to the IMF because if it does not, macro-economic pressures will squeeze the already suffering economy.
“We believe that macroeconomic stresses and pressures on liquidity would probably intensify if Ghana remains unable to issue and does not seek timely support from the IMF. Around 20% of local-currency sovereign debt is held by non-residents, and under such a scenario these investors could lose confidence and sell down their holdings,” said Fitch.
“This could put downward pressure on the currency and force up the government’s borrowing costs. In June, we stated that a prolonged lack of market access leading to a sustained, sharp depreciation of the cedi or a decline in international reserves could be a driver of negative rating action.”
Fitch is one of the so-called „Big Three credit rating agencies”, the other two being Moody’s and Standard & Poor’s.
The forecast is an ominous indictment on the Akufo-Addo government’s mishandling of Ghana’s economy, which has been punctuated by borrowing and corruption.
Ghana’s debt as of May 2021 was Ghc332.4billion, constituting 76.66 percent of Gross Domestic Product. In spite of this, the government is still borrowing, including falling on a US$1billion Special Drawings Rights to fund the 2022 budget.
In March 2021 the country issued USD3 billion in Eurobonds and received USD1 billion in IMF Special Drawing Rights. The government had indicated plans to issue a further USD1 billion on international markets this year, but abandoned these plans in October, noting current market conditions
Because of the huge debt, financial market investors are shying away from the country.
According to Fitch, Ghana’s effective loss of access to international markets increases risks to its ability to meet medium-term financing needs. “Ghana has sufficient liquidity to cover near-term debt servicing without market financing, but there is a danger that non-resident investors in the local bond market could sell their holdings, particularly if confidence in fiscal consolidation weakens, placing significant downward pressure on its reserves.”
“The widening of Ghana’s spreads reflects growing international investor risk aversion, partly because markets now expect US monetary tightening to come sooner than previously anticipated, making it harder for vulnerable sovereigns to attract external financing.”