Domestic Bonds

Default ‘a real possibility’ for Ghana, says Fitch senior manager

Sovereign debt default is “a real possibility” for Ghana, and any kind of domestic debt restructuring could pose a serious threat to the local banking sector, a senior manager at ratings agency Fitch said on Wednesday.

Ghana turned to the International Monetary Fund for help in July as its balance of payments situation deteriorated and hundreds of people took to the streets to protest economic hardship.

An IMF team is expected to visit Ghana next week.

The government is struggling to slow runaway inflation, reduce public debt and revalue the local currency.

“Default is a real possibility,” Fitch chief executive Mahin Dissanayake said at a press briefing in London yesterday.

“Ghanaian banks … hold large volumes of government securities, so the over-indebtedness is going to put a lot of pressure on the banks,” he said. “The operating environment seems very fragile.”

Ghana’s debt stock has more than doubled since 2015, rising steadily from 54.2% of gross domestic product (GDP) that year to 76.6% by the end of 2021, according to government data.

Interest payments have been the government’s largest annual expenditure since 2019, and was its second largest expenditure for five consecutive years before that, according to finance ministry figures. domestic debt accounts for more than 80%.

Dissanayake said reports that Ghana was planning to restructure that local-currency debt under an IMF deal was “highly unusual”, and that implementing such a plan would likely cause significant problems to local banks.

“We estimate that if there was a 30% reduction, it would make at least several banks insolvent,” he said.

“It’s not just the banking sector that would be affected, but also insurance companies, pension funds, asset managers – anyone who holds government securities,” he added.

Ghana’s dollar-denominated sovereign bonds fell 1.6 cents on Wednesday, with debt maturing in 2025 and 2026 seeing the biggest declines, according to Tradeweb data. However, much of the losses came in early trading as investors dumped riskier assets in favor of safe havens amid growing tensions between the West and Russia.

Many of Ghana’s international bonds are trading at record highs, with longer maturities changing hands for less than 40 cents.