Are credit ratings agencies punishing Ghana

Access to international capital markets presents many opportunities for Africa.

It helps diversify funding sources and makes countries less dependent on aid and multilateral and bilateral loans to finance investment and expenditure.

Another advantage of access to international capital markets is that governments can use the money according to their development priorities.

Successful participation in the global bond markets can also positively affect other capital flows to Africa, such as foreign direct investment, as it provides a benchmark of country risk.

High interest rates on Eurobonds
However, interest rates paid by African countries on Eurobonds or commercial debts are too high.

African governments pay 5% to 16% on 10-year government bonds compared to near-zero to negative rates for American and European governments.

Africa’s overinflated risk perception is not even informed by a historical record of default.

Generally, there’s a strong positive correlation between economic strength and creditworthiness, but high economic growth hasn’t typically translated into better sovereign ratings in Africa.

Credit rating agencies, which play a pivotal role in determining these interest rates, are not fair with Africa.

The biases against emerging market economies – especially African entities, both sovereigns and corporates are obvious.

A clear example is that though Argentina had in recent times defaulted on nine separate occasions on its debts, it paid in the region of six to seven per cent coupon rate when it went to the market to raise a 100-year bond.

However, Angola which had not defaulted since the end of the civil war was handed a two-percentage point more than Argentina on the same market.

Also, a comparison between a 10-year dollar-denominated Namibia Eurobond with one from Greece is highly indicative.

Despite its history of defaults, Greece 10- year bonds (Greece-10s) had a spread (over US Treasury bonds) of around 222.6 basis points at the height of the pandemic.

By contrast, Namibia’s-10 year bonds traded with a significantly higher spread – 481.6 basis points – even though both countries have similar credit ratings (Ba3).

The same pattern emerges when comparing the 10-year bonds with similar maturity of Mauritius and Italy.

At Baa1, Mauritius, one of two African countries with an investment grade rating is better off than Italy’s Baa3 which is only one notch above junk status.

And yet, Mauritius’s 10-year bonds had a spread of 245 basis points, against 92.7 basis points for Italy’s.

Azerbaijan, Brazil, and South Africa are all two notches below investment grade.

However, despite their similar credit rating profiles, South Africa-30 year bonds had a spread of 486 basis points, significantly above Brazil-30 year bonds 305 basis points and Azerbaijan-30 year bonds 365.12 basis points.

South Africa-30 year bonds have been trading at a higher premium, and their spread premium increased sharply at the height of the COVID-19 downturn and remained consistently above the spreads of the country’s peers throughout 2020.

Prohibitively high refinancing costs

Developing countries are facing prohibitively high refinancing costs.

Egypt, for instance, which must refinance a chunk of its debt in 2020, is paying around 12.1%, above its average cost of 11.8%.

Similarly, Ghana is paying 15% compared with an average of 11.5%.

With African governments paying default-driven borrowing rates, it is unsurprising that interest expenses have become one of their highest and fastest-growing budgetary expenditures.

These premiums heighten the risk of debt overhang and constrain fiscal space, undermining governments’ capacity to respond effectively to recurrent adverse shocks.

These premiums also have wide-ranging consequences for macroeconomic management and sustainable development in the long run.

By deterring investors, they heighten liquidity constraints in the short term.

And by limiting access to long-term financing, they undermine the process of economic transformation necessary for Africa’s effective integration into the global economy, ensnaring countries in a perpetual debt-distress trap that threatens global financial stability.

Reshaping misperceptions around credit risks and changing African assets’ risk/return profile also hinges on fostering consistency and improving oversight of credit rating agencies.

From this evidence, it should be clear that Ghana’s Finance Minister Ken Ofori-Atta and President Nana Akufo-Addo have solid grounds to criticise the biases of ratings agencies.

The ratings agencies are gods and above criticism of the obvious.

If ratings agencies are punishing Ghana by downgrading the economy because the obvious backed by empirical evidence is pointed out to them, then let posterity judge.

It is interesting how some Ghanaian financial experts seized with this empirical evidence are among those justifying the downgrade on grounds of retaliation for criticism.