1. Introduction

As Ghana’s economy continued to grow, credit rating agencies have played an increasingly important role in assessing the creditworthiness of individuals, businesses, and government entities since 2003, which was a culmination of sustained progress made by then government and a critical component of the government’s objective of moving the economy from stability to growth (Bawumia,2010).  In preparation for accessing the international capital market, Ghana submitted itself to the sovereign credit rating process. The strategy of seeking a sovereign credit rating was also to subject the Ghana’s economy to greater market scrutiny and surveillance and thus enhanced accountability and transparency that enabled Ghana to secure first ratings assessment B+ by S&P, and B-positive outlook by Fitch in 2007 (Bawumia, 2010).

Credit rating agencies use a variety of methods to analyze credit risks and provide ratings that help investors and lenders make informed decisions. In this article, we will take a closer look at credit rating agencies in Ghana, their history, how they operate, and their impact on the country’s economy. Credit rating agencies played a crucial role in Ghana’s economy. These global credit rating agencies have helped investors and lenders make informed decisions about where to invest their money or extend credit. By providing independent assessments of creditworthiness, credit rating agencies increase transparency in the financial markets. This, in turn, promotes investment, economic growth, and financial stability. The Ghana’s sovereign debt crisis in 2022 has drawn considerable attention to the role of Credit Rating Agencies in the financial system. The global credit rating agencies have been criticized by the President Akuffo-Addo as reckless in their downgrades of the Ghanaian economy after the country defaulted on both her huge domestic and external debt obligations in 2022.

Both quantitative and qualitative data available clearly showed  that the Global Credit Rating Agencies such as Fitch, Moody’s and S&P have been conducting risk rating on the Ghanaian economy as far back as 2003 and have been issuing some positive results for bonds issued on the international capital markets (BB+, B+ and B-) on which history was made in 2007 when Ghana issued its debut US$ 750 million sovereign bond on the international capital markets, as the only Sub-Saharan African country other than South Africa and joined only Egypt, Morocco and South Africa on the entire continent to do so (Bawumia, 2010). The bond issue was successful and was four times oversubscribed and these oversubscribe practices had been positive outlook over the past two decades including 2007 the 10- year bond of US$ 750 million with coupon rate of 8.2% p.a. raised on the international capital markets. In addition, Ghana have successfully raised US$ 1 billion in 2013, another US$ 1 billion in 2014, US$2 billion in 2018, US$ 3billion in 2019, US$3 billion in 2020 and US$ 3 billion in 2021. The 2021 transaction comprised four tranches – US$ 525 million 4-year Zero Coupon, US$ 1 billion 7 year Weighted Average Life priced at 7.75%, US$1 billion 12-year WAL at 8.625% and US$ 500 million 20 year WAL with coupon rate of 8.875.  

All bonds issued including Ghana’s debut bonds have risk rated either B+, or BB- and BB+ by Fitch, Standard and Poor’s or Moody’s. The successful issuance of the various bonds was testament to investors renewed confidence as well as the positive ratings by three credit rating agencies. Credit rating agencies had been incredibly important for Ghana for several reasons.

The rating agencies like S&P, Moody’s and Fitch have acted as a kind of moral suasion that compelled Government of Ghana to pursue more prudent and sensible monetary and fiscal policies. Sovereign ratings serve as an incentive for sound monetary and fiscal policies because performance on these policies forms an integral part of the rating methodologies (Ocran, 2015).

The favorable and positive ratings over the past sixteen years, have enabled the government to raise capital in the international financial markets.  Institutional investors in the developing countries such as Ghana rely heavily on rating agencies in making investment decisions. This is because global credit rating agencies are essentially opinions about credit risk. Ratings provide insight into the credit quality of an individual debt issue and the relative likelihood that the issuer may default (Ocran, 2015)

However, empirical evidences based on both quantitative and qualitative data clearly showed that during the year 2022, Ghanaian economy was downgraded eleven times by the global credit rating agencies, Fitch, Moody’s and S&P as a result of dwindled foreign exchange reserves, persistent depreciation of the local currency against major trading currencies like US$, Euro and UK pound sterling, high inflation, high fiscal deficit, current account deficits, high debt servicing obligations, the lack of the access to capital markets, shortfall in government revenues and an increase in expenditures associated with the pandemic, over-bloated government expenditures and the weakened economy which clearly showed that Ghana was classified as default by credit rating agencies. From both quantitative and qualitative data review there are no evidence that S&P, Moody’s and Fitch have been reckless in downgrading the Ghanaian economy eleven times in 2022. Ghana is a rarity in West Africa due to its record of political stability and with previous strong economic growth but has been wrestling with escalating inflation, a falling currency, current account deficits and a stubborn highly budget deficit which pointed to default

However, S&P, Moody’s and Fitch all have defined default as-(i) failure to pay a material sum of interest or principal on a debt instrument on its due date or within applicable principal or interest during grace periods as stipulated in Ghana government indenture or (ii) rescheduling, debt exchange or other debt restructuring of a debt instrument conducted in a manner deemed to be coercive, involuntary, and distressed as determined on a case by case by each agency (Samson, 2001; Keenan, 2000). The above empirical evidence clearly showed that S&P, Moody’s and Fitch were not reckless in their downgrade of the Ghanaian economy.

2. Background on Global Credit Rating Agencies

Global credit rating agencies (CRAs) may be simply defined as ‘specialists in providing information regarding bond creditworthiness’. Credit ratings express an agency’s opinion about the ability and willingness of any issuer – governments, financial institutions, corporations, insurance companies and structured finance – to meet its financial obligations in full and on time (Ocran, 2015).Credit rating agencies play a key role in financial markets by helping to reduce the informative asymmetry between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of companies (corporate risk) or countries (sovereign risk).  There are more than 70 agencies around the world. But three dominate, controlling 91% of the global market. They are Standard & Poor’s, Fitch. Moody’s and Scope. The credit rating industry in Africa dominated by the three international agencies: Moody’s, S&P and Fitch. Together they control an estimated 95% of the credit rating business globally. These Global credit rating agencies play an important role in economic growth or decline. Generous credit rating may allow countries or businesses to take on too much debt, at risk of defaulting. Overcautious ratings can hinder their access to finance, stifle investment, slow growth (Kraft, 2023). Creditworthiness is ‘the likelihood that an issuer will default on the interest or principal due on its bonds. Credit rating agencies step in to analyze the country’s balance of payment position, strategies, and performance, they give new bonds a rating (score) that flags the bond’s creditworthiness.  

Credit rating agencies are thus commercial firms that assess the ability of companies, institutions and governments to service their debts. They do this by assigning credit ratings, typically in the form of a letter-grade scale, which symbolizes the rating agency’s opinion, as of a specific date, of the creditworthiness of a particular company, security, or obligation. It is important to note that credit rating agencies are not an absolute predictor of whether a particular debtor will default on a particular obligation, but is a subjective view regarding the creditworthiness of a company, security or obligation. The logic underlying the existence of credit rating agencies is to solve the problem of the informative asymmetry between lenders and borrowers regarding the creditworthiness of the latter. Issuers with lower credit ratings pay higher interest rates embodying larger risk premiums than higher rated issuers.

Moreover, ratings determine the eligibility of debt and other financial instruments for the portfolios of certain institutional investors due to national regulations that restrict investment in speculative-grade bonds (Elkhoury, 2008). Regarding their role vis-à-vis developing countries, the rating of country and sovereign is particularly important. As defined by Nagy (1984), "Country risk is the exposure to a loss in cross-border lending, caused by events in a particular country which are – at least to some extent – under the control of the government but definitely not under the control of a private enterprise or individual". Under this definition, all forms of cross-border lending in a country– whether to the government, a bank, a private enterprise or an individual – are included. Country risk is therefore a broader concept than sovereign risk. The latter is restricted to the risk of lending to the government of a sovereign nation. However, sovereign and country risks are highly correlated as the government is the major actor affecting both. Rare exceptions to the principle of the sovereign ceiling – that the debt rating of a company or bank based in a country cannot exceed the country’s sovereign rating – do occur

3. Global Credit Rating Agencies’ Functions

The Credit Rating Agencies’ functions can be grouped under three general headings: (i) providing information and assessment for investors; (ii) enabling issuers to access capital markets; and (iii) helping regulators to regulate

(i) Providing Information and Assessment for Investors

Credit rating agencies and the ratings that they supply are an invaluable information resource for investors. John Moody published the first publicly available bond ratings (mostly concerning railroad bonds) in 1909. Moody's firm 10 was followed by Poor's Publishing Company in 1916, the Standard Statistics Company in 1922, and the Fitch Publishing Company in 1924. These firms sold their bond ratings to bond investors in thick rating manuals. In the language of modern corporate strategy, their "business model" was one of "investor pays." They play the critical role of determining the credit quality of debt securities which would otherwise need to be undertaken by prospective bond investors themselves. Credit quality is primarily determined by the expected loss of the security (the product of its expected default rate and expected loss severity), but can include many other dimensions such as financial strength and transition risk so that ‘bonds with the same credit rating may be comparable with respect to overall credit quality, but may differ with respect to specific credit quality characteristics’(Cantor, 2001).

ii) Enabling Issuers to Access the Capital Markets

Whilst the origins of the credit rating agencies industry were such that investors paid for the ratings assigned by agencies, it is now the case that the leading credit rating agencies all receive their revenues from the issuers of securities. Issuers paid credit rating agencies to evaluate their creditworthiness and assign them ratings because this effectively certifies the financial products of the issuer, giving them access to a ready market of investors. Each rating mandate lasts for several years while the credit rating agency monitors the issuer. In this way, rating agencies can provide issuers with access to more financial market segments and cheaper costs of borrowing than permitted by traditional bank lending. This allows issuers to structure their financing in a more efficient manner across a range of loans, bonds, commercial papers, bank deposits and insurance claims, allowing the issuer to minimize its cost of capital. In theory, credit rating agencies also attempt to minimize abrupt changes in rating levels and ensure that rating decisions are ‘time-invariant’, incorporating the vulnerabilities of issuers to cyclical economic conditions. This minimizes the negative impact on an issuer’s cost of borrowing which accompanies rating downgrades. The rating decision is only adjusted in the event of significant changes in the client’s financial situation which mean that the rating action is unlikely to be reviewed within a relatively short period of time.

(iii) Helping Regulators to Regulate

Credit rating agencies are also important from a regulatory perspective. Over recent decades, regulators have increasingly used credit ratings to help monitor the risk of investments held by regulated entities, and to provide a suitable disclosure framework for securities of differing risks. Credit rating agencies’ judgements define a globally uniform benchmark for credit risk and this also makes them an attractive reference for international regulatory standards, a reason that the Bank for International Settlements (BIS) decided to use them in Basel 2 and 3 to calculate banks’ regulatory risk capital.

4. Credit Rating Agencies’ Processes, Procedures and Methods

A. Quantitative and qualitative methods

Rating agencies derive their ratings applying published methodologies. While the methodologies, as well as the ratings differ between the three agencies the main building blocks are the same. They consist of an analysis of (i) institutional and governance quality; (ii) economic growth and resilience; (iii) public finances;

(iv) external accounts; and (v) monetary flexibility. The agencies typically create indicative “anchor scores” for each of the five rating factors and then apply a “qualitative” overlay. The credit committee can adjust the indicative scores up or down. The rating, which is always determined by a group of analysts in a credit committee is therefore a mix of objective quantitative and subjective qualitative factors. Rating agencies use comparable rating scales with 20 rungs from the highest (AAA) to the lowest (D), with the upper ten ratings (AAA to BBB-) being referred to as investment grade, and the lower half (starting from BB+) as non-investment grade, or speculative grade.

The credit rating agencies around the world use processes and methods used to assess rating of individual countries. Traditionally, credit rating agencies have relied on a process based on a quantitative and qualitative assessment reviewed and finalized by a rating committee. More recently, there has been increased reliance on quantitative statistical models based on publicly available data with the result that the assessment process is more mechanical and involves less reliance on confidential information. No single model outperforms all the others. Performance is heavily influenced by circumstances. A sovereign rating is aimed at "measuring the risk that a government may default on its own obligations in either local or foreign currency. It takes into account both the ability and willingness of a government to repay its debt in a timely manner.  " The key measure in credit risk models is the measure of the Probability of Default (PD) but exposure is also determined by the expected timing of default and by the Recovery Rate (RE) after default has occurred: The three crediting rating agencies, S&Ps, Moody’s and Fitch’s have the under-listed rating methodologies

• Standard and Poor's ratings seek to capture only the forward-looking probability of the occurrence of default. They provide no assessment of the expected time of default or mode of default resolution and recovery values;

• By contrast, Moody's ratings focus on the Expected Loss (EL) which is a function of both Probability of Default (PD) and the expected Recovery Rate (RE). Thus EL =PD (1- RE); and

• Fitch's ratings also focus on both PD and RE (Bhatia, 2002). They have a more explicitly hybrid character in that analysts are also reminded to be forward-looking and to be alert to possible discontinuities between past track records and future trends. The credit ratings of Moody's and Standard and Poor's are assigned by rating committees and not by individual analysts. There is a large dose of judgement in the committees’ final ratings.

Credit Rating Agencies provide little guidance as to how they assign relative weights to each factor, though they do provide information on what variables they consider in determining sovereign ratings.

Identifying the relationship between the CRAs' criteria and actual ratings is difficult, in part because some of the criteria used are neither quantitative nor quantifiable but qualitative. The analytical variables are interrelated and the weights are not fixed either across sovereigns or over time. Even for quantifiable factors, determining relative weights is difficult because the agencies rely on a large number of criteria and there is no formula for combining the scores to determine ratings. In assessing sovereign risk, Credit Rating Agencies highlight several risk parameters of varying importance:

(i) economic; (ii) political; (iii) fiscal and monetary flexibility; and (iv) the debt burden. Economic risk addresses the ability to repay its obligations on time and is a function of both quantitative and qualitative factors. Political risk addresses the sovereign's willingness to repay debt. Willingness to pay is a qualitative issue that distinguishes sovereigns from most other types of issuers. Partly because creditors have only limited legal redress, a government can (and sometimes does) default selectively on its obligations, even when it possesses the financial capacity for debt service. In practice, political risk and economic risk are related. A government that is unwilling to repay debt is usually pursuing economic policies that weaken its ability to do so. Willingness to pay, therefore, encompasses the range of economic and political factors influencing government policy’

5. Literature Review on global credit rating agencies

To set up international portfolios for investors, several requirements need to be met, and credit ratings are amongst the most vital requirements (Fatnassi et al. 2014). If a country is downgraded and rated below investment grade, many institutional investors must hold investment-grade securities. Studies have shown that most foreign investors are likely to withdraw funds if a country does not have an investment-grade rating (Mugobo and Mutize 2016). The literature also points out that, although various factors have underlining effects on the economy, more recent studies have come to acknowledge the significance and impact of sovereign credit ratings.

Turning towards various macroeconomic indicators identified in the literature as determinants of sovereign credit ratings, theoretically, the link between sovereign credit rating decisions and the economic and financial outcome is not always linear (Hanusch et al. 2016). Be that as it may, credit rating downgrades are linked to real economic variables such as investments and growth (Hanusch et al. 2016). Credit ratings are also vital for stimulating investments and promoting economic growth (Boumparis et al. 2017). The literature also asserts the importance of avoiding sovereign credit downgrades as this, at an economic level, is essential to achieve growth (Hanusch et al. 2016). The importance of FDI is highlighted in the literature where FDI represents international business activities incorporating a transfer of technology and know-how, a movement of capital, thus contributing

to employment, trade and competitiveness, which could promote economic growth and development (Derado 2013). Compared to domestic investment, FDI is also vital for its increasing contribution towards economic growth (Borensztein et al. 1998). Many developing countries, likewise, prioritize it because domestic capital accumulation remains too low to stimulate economic growth (Farole and Winkler 2014). The augments provided by the neoclassical and endogenous growth models indicate that FDI, directly and indirectly, contributes towards economic growth (Mugowo 2017) perspective to investigate the link between sovereign credit ratings and macroeconomic variables. One of the earlier studies that focused on sovereign ratings and their determinants is the study by Cantor and Packer (1996), where a sample of 49 countries for the year 1995 was used. The study also considered eight economic variables as determinants of sovereign credit ratings. Their results revealed that external debt, default history, GDP, per capita income, inflation, and economic development level all significantly impact sovereign credit ratings. Following the study of Cantor and Packer, numerous studies such as the studies of Bissoondoyal-Bheenick (2005); Bayar and Kilic (2014); Asongu et al. (2018); Derado (2013); Mellios and Paget-Blanc (2006) have identified other variables such as growth rate, level of development, openness to trade, foreign exchange effects, labor costs, return on investment and infrastructure, FDI inflows, size of the banking sector, government indicators and political risk as determinants of sovereign credit ratings. Aras and Öztürk (2018) also found a positive and significant relationship between inflation rate, external debt and sovereign credit ratings in Turkey, whilst Slabbert et al. (2019) investigated the importance of sovereign credit ratings in relation to government debt of developing countries, and further highlighted the importance and relevance of sovereign credit ratings in determining the cost of government debt for developing nations.

The theoretical position of the significance of sovereign credit ratings was examined in various studies, such as Chen et al. (2016), who investigated the relationship between sovereign credit rating revisions and economic growth from 1982–2012. Their findings reveal that a one-notch credit rating upgrade leads to an average increase of a 0.6% annual growth rate through the interest rate and capital flow channels that changes in a country’s credit rating could affect economic growth. Dudian and Popa (2012) analyzed the relationship between sovereign credit ratings and GDP for Central and Eastern European countries between 1996–2010. Their results revealed a negative relationship between sovereign credit rating and GDP. Contrary to these results, Aras and Öztürk (2018) used a panel regression from 2002–2014 to investigate the determinants of sovereign ratings in Turkey and EU countries. Their results reveal that foreign trade balance negatively affects a sovereign’s credit rating, while the economic growth rate positively affects a sovereign credit rating.  Brooks et al. (2004) investigated the national market impact of sovereign rating changes. They found that a credit rating downgrade negatively affects the domestic stock market and the dollar value of the country’s currency. Similar findings were also found by Alsakka and Gwilym (2013), who investigated the ratings agencies’ signals during the European sovereign debt crisis. Their study revealed that ratings agencies’ signals impact the country’s exchange rate and have also identified strong spillover effects on other countries’ exchange rates within the region.

The literature further contends that an economy cannot function efficiently and effectively without vital components such as financial institutions. This is because banks serve as an intermediary between borrowers and lenders, and as a result, there is a link to sovereign ratings through the credit and interest rate channels. Mensah et al. (2017) investigated sovereign credit ratings and bank funding costs in Africa and revealed a statistically significant inverse relationship between sovereign rating upgrades and bank funding costs.

Their results further highlight that it becomes easier and cheaper for banks to access funds from the capital and global markets during a period of sovereign credit upgrades compared to rating downgrades. Moreover, Adelino and Ferreira (2016) investigated bank ratings and lending supply with evidence from sovereign downgrades. They concluded that sovereign downgrades bring about a reduction in loan amounts from banks and lead to higher loan spread increases.

Additionally, Luitel and Vanpée (2018) examined the importance of having a sovereign credit rating for a country’s financial development. Their study revealed that credit ratings attract foreign investors, both FDI as well as portfolio investments. The study further concluded that SCR’s play a vital role in enabling financial development in a country. The impact of Sovereign credit ratings on FDI in South Africa was investigated by Mugobo and Mutize (2016). Their results revealed a significant relationship between FDI and sovereign credit rating downgrades. Furthermore, their study also revealed that not all downgrades affect investor decisions, as Moody’s SCR’s tend to dominate, causing FDI to have a more extensive reaction than other rating agencies. Walch and Worz (2012) found a non-linear effect of credit ratings, indicating that rating upgrades had a more significant positive impact on FDI inflows. This effect is reduced when the risk level is more significant. Ozturk (2012) used 61 developing countries to analyze the relationship between FDI inflows and the private sector’s external finance. The study found that having an investment-grade rating brought about an increase in FDI inflows. Meanwhile, the study of Bayar and Kilic (2014) observed a positive relationship between FDI inflows and sovereign credit ratings, following a two-way causality between sovereign credit ratings and issued by Moody’s and FDI inflows in Turkey from 2005–2013. In conclusion, there is no conclusive empirical evidence from the literature review that shows the relationship and direction of causality between sovereign credit rating decisions and economic variables. Therefore, this study bridges the literature gap by providing a developing country perspective for Ghana. Secondly, this study provides a current perspective of how a country’s economic mismanagement impact negatively on sovereign credit ratings on the downgrade of  Ghanaian economy.

6. Empirical data assessments of credit rating determinants

A number of economists have estimated econometrically the determinants of credit ratings for both mature and emerging markets (Cantor and Packer, 1995, 1996; Haque et al., 1996,1997; Reisen and von Maltzan 1999; Juttner and McCarthy, 2000; and Bhatia, 2002). In these studies, a small number of variables explain 90 per cent of the variation in the ratings:

• GDP per capita;

• GDP Growth;

• Inflation;

• The ratio of non-gold foreign exchange reserves to imports;

• The ratio of the current account balance to GDP; and

• Default history and the level of economic development.

Indeed, a single variable GDP per capita, explains about 80 per cent of the variation in ratings (Borenszstein and Panizza, 2006). It is worth noting that the fiscal position, measured by the average annual central government budget deficit/surplus ratio to GDP, in the three years before the rating year and the external position measured by the average annual current account deficit/surplus in relation to GDP, in the three years before the rating year, were found to be statistically insignificant.

While including political events can improve the explanatory power of the regressions, the exclusion of political variables does not bias  the parameter estimates (Haque et al., 1996; Cantor and Packer, 1996). In addition, for developing country ratings, two other variables adversely affected ratings independently of domestic economic fundamentals (Haque et al.,1996, 1997):• Increases in international interest rates; and

• The structure of its exports and its concentration. Jüttner and McCarthy (2000), found a structural break in ratings assessment in 1997 in the wake of the South-East Asian crisis. "Econometric estimates may convey wrong or meaningless signals to investors during a rating crisis, there is no set model or framework for judgement which are capable of explaining the variations in assignment of sovereign ratings over time "

7. Key Sovereign Credit Rating Methodology Profile (2006;2016) Use to Assess the Developing / Emerging economies

Political risk

• Stability and legitimacy of political institutions;

• Popular participation in political processes;

• Orderliness of leadership successions;

• Transparency in economic policy decisions and objectives;

• Public security; and

• Geopolitical risk.

Income and economic structure

• Prosperity, diversity and degree to which economy is market oriented.

• Income disparities.

• Effectiveness of financial sector in intermediating funs availability of credit.

• Competitiveness and profitability of non-financial private sector.

• Efficiency of public sector.

• Protectionism and other non-market influences; and

• Labour flexibility.

Economic growth prospects

• Size and composition of savings and investment; and

• Rate and pattern of economic growth.

Fiscal flexibility

• General government revenue, expenditure, and surplus/deficit trends.

• Revenue-raising flexibility and efficiency.

• Expenditure effectiveness and pressures.

• Timeliness, coverage, and transparency in reporting; and

• Pension obligations.

General government burden

• General government gross and net (of assets) debt as a per cent of GDP

• Share of revenue devoted to interest

• Currency composition and maturity profile; and

• Depth and breadth of local capital markets.

Offshore and contingent liabilities

• Size and health of NFPEs; and

• Robustness of financial sector.

Monetary flexibility

• Price behaviour in economic cycles.

• Money and credit expansion.

• Compatibility of exchange rate regime and monetary goals.

• Institutional factors such as central bank independence; and

• Range and efficiency of monetary goals.

External liquidity

• Impact of fiscal and monetary policies on external accounts.

• Structure of the current account.

• Composition of capital flows; and

• Reserve adequacy.

External debt burden

• Gross and net external debt, including deposits and structured debt;

• Maturity profile, currency composition, and sensitivity to interest rate changes;

 Debt to GDP ratios

• Access to concessional lending; and

• Debt service burden.

Source: Standard and Poor's (October 2006). “Sovereign Credit Ratings: A Primer. Notes: NFPEs: Non-Financial Public Sector Enterprises

8. S&P, Moody’s, and Fitch Rating Methodologies

The three credit rating agencies have varying rating methodologies

 S&P includes long-term ratings from the highest AAA to the lowest D rating. Moody’s includes long-term ratings from the highest Aaa to the lowest C. Fitch includes long-term ratings from the highest AAA to the lowest D rating. Scope includes long-term foreign-currency ratings from the highest AAA to the lowest Dmain groups based on the level of credit risk: investment grade for lower levels of credit risk and speculative grade for higher levels of credit risk. For S&P, Fitch and Scope, investment grade issues/issuers are those rated from BBB- and above, while those from BB+ and below are categorized as speculative grade. Moody’s denotes as investment grade issues/issuers as those rated from Baa3 and above, while ratings from Ba1 and below fall into the category of speculative grade. All four agencies include modifiers into their generic alphabet-based ratings for particular ranges. Ratings from S&P, and Fitch are modified with “+” or “-” from the range AA to CCC. Moody’s appends numerical modifiers from 1 to 3 to the generic rating classifications from Aa to Caa1 indicates standing in the higher end of the generic category, while 3 indicates ranking in the lower end. All modifiers denote relative status within major ratings categories. Rating Outlooks indicate the direction the rating is likely to move over a one- to two-year period. In determining an outlook, consideration is given to any changes in fundamental business conditions. Credit Watch focuses on identifiable events that cause ratings to be placed under special surveillance. Rating Outlooks/Watches for the three agencies are the following:

• Positive means that a rating may be raised
• Negative means that a rating may be lowered
• Stable means a rating is not likely to change

When the fundamental trend has strong, conflicting elements of both positive and negative, the Outlook/Watch can be denoted as Developing (for Scope, a Stable Outlook would be assigned in this case)

9. Overview of Ghana’s Economic and Debt Sustainability Challenges for the period 2021-2023

In recent years, Ghana's fiscal and debt sustainability has been eroded by rising government spending in the context of continuous low domestic resource mobilization. Ghana’s debt as a proportion of its GDP has increased drastically over the last two decades. Figures from the International Monetary Fund (IMF) show more than a 100 percent increment between 2010 and 2022. Coupled with low domestic revenue mobilization, this unsustainable debt level has plunged the country into its worst fiscal or economic turmoil in decades. By the end of 2022, according to Ghana's Finance Minister, debt servicing was absorbing more than half of the government's total revenue and up to 70% of tax revenues. The Ghanaian finance ministry has stated that this crisis can be traced in part to the government's excessive spending because of the Covid-19 outbreak and others have linked it to the Russia- Ukraine war. Given that almost all countries in the world are affected by the pandemic and the war in Ukraine but with different economic outcomes, some are attributing economic challenges to improper management of the economy to mitigate external shocks. Ghana’s 2020 fiscal deficit had soared to 11.4% due to a shortfall in government revenues and an increase in expenditures associated with the pandemic. This compelled Government of Ghana and Ministry of Finance to suspend the fiscal responsibility law that had been set in place to limit annual fiscal deficits to 5% of GDP. This 2021 fiscal deficit narrowed to 9.6% in 2021 and expected to narrow further in 2022. The country’s debt-to-GDP ratio hit 78.0% in March 2022. Out of the total debt stock of USD 55.1 billion, external debt accounts for USD 28.4 billion (40.2% of GDP) and domestic debt is USD 23.9 billion (GHS 189.9 billion, 37.8% of GDP).

The IMF however estimates the debt of Ghana to reach 84.6% of GDP by the end of 2022. Compared to the estimated average (55.1%) of Sub-Saharan Africa, Ghana’s debt must be considered as high. Forecasts suggest that the debt levels are likely to continue growing and might only peak around 2024. The largest expenditure items of the government in 2021 were compensation of employees (about 700,000 public sector employees alone absorbing 56.0% of the 2021 tax revenues), interest payments for public debts and statutory funds which together amounted to 144% of tax revenue. The government has therefore depended on non-tax revenue and further debt to cover its expenditure The local currency Cedis has in the last two years undergone significant depreciation against major foreign currencies, especially against the U.S dollar. In January 2022, one US dollar equaled Ghc6.2968, but by the end of 2022, the Ghana Cedis had devalued by more than 100 percent, with one dollar equaling Ghc14.07. With more than 70% of Ghana's debt in the US dollar, depreciation of the cedi means higher debt service costs The high level of debt and the related interest rate payments were the major problems that Ghana was facing.  

Ghana’s new private debt has been less concessional. Ghana's high economic growth and economic status upgrade by global agencies like the World Bank has made it ineligible for concessional loans. That is not to say economic growth is bad or unhealthy, in fact that should be the country's goal. The argument is to highlight that Ghana's debt has now become more expensive. Even in the wake of a debt restructuring program, domestic debt servicing alone is projected to take up to 37% of the government's budgeted expenditure. The government borrowed extensively from both international and domestic markets to undertake its programs, pay huge debts to independent power producers, and make up the revenue shortfall from abolishing and reducing 18 taxes and levies (although the government eventually introduced more taxes) and these led to fiscal and debt vulnerabilities. Ghana’s fiscal and debt vulnerabilities worsened fast amid an increasingly challenging external environment. During the COVID-19 pandemic, Ghana’s public debt increased significantly. At the same time, the government’s efforts to preserve debt sustainability were not seen as sufficient by investors, leading to credit rating downgrades, the exit of non-resident investors from the domestic bond market, and ultimately Ghana’s loss of access to international capital markets. These adverse developments, further exacerbated by price and supply-chain shocks from the war in Ukraine, have led to a large exchange rate depreciation, a surge in inflation (54.1 percent year on year in December, 2022) and pressure on foreign exchange reserves.  Ghana’s debt sustainability analysis indicates that the country’s debt is unsustainable. This means Ghana is unable to meet all its debt obligations, necessitating the need for a debt renegotiation programme. This is also required to secure an IMF programme to help strengthen the country's fragile fiscal balances. Against this backdrop, the government requested assistance from the IMF in early summer and a staff-level agreement was reached in December 2022.

Ghana continued to face severe economic and financial challenges since late 2022. This has included defaulting on some of its domestic and international debt. In December 2022, Ghana declared a moratorium on its international debt and further technically defaulted in February 2023 after failing to pay a coupon - the interest rate paid on a bond - on one of its debts following the expiration of a grace period. Real GDP growth slowed to 3.3% in 2022 from 5.4% in 2021 due to macroeconomic instability, global financial tightening, and spillover effects of Russia’s invasion of Ukraine. Inflation was an estimated 54.1% in 2022, up from 10% in 2021, driven by food and energy prices and depreciating local currency. The Bank of Ghana tightened monetary policy; the policy rate was hiked to 29.5% in 2022 from 14.5% in 2021. The fiscal deficit widened slightly, to 9.3% of GDP from 9.2% in 2021, due to higher spending. Public debt hit 93.5% of GDP in 2022, up from 82.0% in 2021, driven by primary fiscal deficits and exchange rate depreciation. The current account deficit narrowed to 2.8% of GDP from 3.2%, driven by an improved trade balance. The capital and financial accounts recorded deficits. Foreign exchange reserves declined to $6.2 billion in 2022 (2.9 months of import cover) from $9.7 billion in 2021 (6.9 months). The financial sector remained sound. At 14.2%, the capital adequacy ratio is above the target of 13.0% but declining. Credit risk, measured by the nonperforming loans ratio, remained elevated at 14.8%, and real credit growth declined to 14.5% due to rising inflation. The poverty rate declined from 11% in 2021 to 10% in 2022. However, living standards have been negatively impacted by the rising cost of living and unemployment. The latter increased from 11.9% in 2015 to 13.4% in 2021, with youth (ages 15–24) unemployment an estimated 7.2% in 2021, up from 7.3% in 2020. GDP growth is estimated to have slowed to 3.2% in 2022, down from 5.4% in 2021. The slowdown affected mostly the non-extractive sectors, as the recovery in gold exports supported extractives growth. The agriculture and services sectors experienced slower growth in 2022 than the year before. High inflation and interest rates depressed private consumption and investment. Government demand was weakened by lack of access to capital markets and high debt service obligations. The 2022 fiscal deficit was well above target. The overall fiscal deficit (on a cash basis) reached 9.9% of GDP against a target of 6.7%. Inflation accelerated throughout the year. In 2022, average CPI inflation was 31.5%, (up from 10% in 2021) and reached 40.1% in July 2022 increased further to 54.1% in December,2022 (y-o-y). The Bank of Ghana (BOG) responded by increasing the monetary policy rate from 14.5 to 29.5 % over the year. However, these efforts were undermined by the government’s extensive use of its overdraft facility with BOG (estimated at 6.7% of GDP in 2022). Overall, the balance of payments recorded a deficit of 5% of GDP, from a surplus of 1.9% in 2021.

In conclusion 2022, Ghana's economic growth decreased as a result of the sovereign crisis. In December, Ghana ceased to make payments on its external debt to official bilateral and external commercial creditors, leading to mounting arrears. The agreement reached with the International Monetary Fund in mid-May 2023 is the first step towards a comprehensive debt-restructuring process that will involve the G20 group, including China, and domestic debt issued to banks that have already suffered substantial haircuts. In the third quarter of 2022, Ghana's GDP growth slowed to +2.9% from +6.4% the previous year. Non-extractive industries led the downturn because they were hit the hardest by the widespread slowdown brought on by falling corporate and consumer confidence. However, a pick-up in growth of extractive operations is projected to have kept GDP growth at around +3.1% in 2022, reflecting better global commodity prices and the return of small-scale gold mining after a drop in withholding taxes on raw gold. Central bank reserves dropped to a critically low level in the past quarters and the local currency (Cedi) has depreciated significantly. Exports of cocoa, gold and oil helped reduce the current account deficit from 3.2% of GDP in 2021 to 2.1% in 2022, more than offsetting the impact of rising imports. However, intense balance of payment pressures resulted since Ghana was cut off from international capital markets, faced capital withdrawals and had trouble rolling over central bank foreign exchange liabilities. Gross international reserves fell to USD1.1bn (0.5 months of imports) at the end of February 2023, almost USD5bn below the level of mid-2021, largely due to foreign exchange interventions by the Bank of Ghana to reduce volatility. As a result of these factors, the value of the Cedi has dropped by more than -50% since the end of 2021.

10. Credit Rating Agencies’ Key Rating Drivers Used the Downgrade of Ghanaian Economy in 2022 by S&P, Moody’s and Fitch.

Empirical evidences showed that during the year 2022, Ghana’s economy was downgraded eleven times by the global credit rating agencies, Fitch, Moody’s and S&P as a result of dwindled foreign exchange reserves, persistent depreciation of the local currency against major trading currencies like US$, Euro and UK pound sterling, high inflation, high fiscal deficit, current account deficits, high debt servicing obligations, the lack of the access to capital markets, shortfall in government revenues and an increase in expenditures associated with the pandemic, over-bloated government expenditures and the weakened economy. Downgraded dates by three global credit rating agencies are under-listed time schedule with relevant ratings.

On 14 January 2022, Fitch downgraded Ghana’s sovereign rating to B- with a negative outlook due to the surge in government debt and high-interest expenditure relative to revenue ratio. Fitch rating began the first downgrade of Ghana’s economy on Ghana’s Long-Term Foreign Currency Issuer Rating Issuer Defaulting Rating from B to B- with a negative outlook

 Fitch Rating on the 5^th August 2022, further again downgraded Ghana’s Long –Term Foreign Currency Issuer Default to CCC from B-. The downgrade reflected the deterioration of Ghana’s public finance, which had been contributed to a prolonged lack of access to Eurobond markets as well as high interest payment on the domestic debt which led to a significant decline in external liquidity. In the absence of new funding from the Euro-markets, the country’s foreign exchange reserves fell close to 2 months of current payments.

Fitch Rating on 23^rd September 2022 further downgraded Ghana’s Long-Term Local and Foreign Currency Issuer Defaulting Rating from CC to C. Tight External Debt Servicing Schedule: Fitch estimates that Ghana faces USD2.75 billion of external debt servicing in 2022, including amortization and interest, and USD2.8 billion in 2023. Access to external financing will remain tight, as Ghana is likely to remain locked out of Eurobond markets, which had come to be a regular source of external financing for the government. In 2022, we expect that the government will meet its external debt obligations, in part, through a combination of a USD750 million term loan from the African Export-Import Bank (BBB), USD250 million in syndicated loans from international commercial banks, and up to USD200 million from the government's sinking fund. The 2022 mid-year policy review indicates that the government expects to source the rest from the IMF and other multilateral lenders. In the absence of an approved programme by the end of the year, the government would have to draw more heavily on its international reserves, which were USD7.6 billion, including oil funds and encumbered assets, as of June 2022

Fitch Rating on the 8^TH December,2022 further downgraded Ghana’s Long Term Local Currency Issuer Defaulting Rating to C from CC. The issue ratings on local currency bonds issued domestically were also downgraded to C from CC. The downgraded was also part of government domestic debt restructuring announced on the 5^th December,2022.  Increased Probability of Debt Restructuring: The downgrade reflects the increased likelihood that Ghana will pursue a debt restructuring given mounting financing stress, with surging interest costs on domestic debt and a prolonged lack of access to Eurobond markets. There is a high likelihood that the IMF support programme currently being negotiated will require some form of debt treatment due to the climbing interest costs and structurally low revenue as a percentage of GDP. We believe this will be in the form of a debt exchange and will qualify as a distressed debt exchange under our criteria. The government has not confirmed or denied press reports that Ghana is preparing to negotiate a restructuring. Interest costs on external debt are lower than for domestic debt and near-term external debt amortizations appear manageable. However, we believe there could be an incentive to spread a debt restructuring burden across domestic and external creditors and therefore do not have a strong basis to differentiate between Foreign- and Local-Currency ratings at this time.

On 4 February 2022, Moody’s downgraded Ghana from B3 to Caa1 with a stable outlook, referring to the challenges related to liquidity, high risk of debt default and weak revenue generation. Moody’s rating agency downgraded the Ghana’s credit rating from B3 to Caa1 confirming Ghana’s debt as very high credit risk.

Moody’s Rating Agency on 30^th September, 2022 further downgraded country’s Long Term Issuer and Senior unsecured debt rating to Caa2 from Caa1.

Moody’s rating agency on 3^rd October 2022 issued another downgrade on Ghana’s Long-Term Issuer and Senior Unsecured debt ratings to Caa2 from Caa1. The rating of downgrade to Caa2 reflected the deteriorating macroeconomic environment that heightened the government liquidity and debt sustainability challenges that could result of possibility of risk of default

Moody’s Rating agency on 5^th November 2022 Ghana’s debt was further downgraded deeper into junk territory and the likelihood that private creditors could incur steeper losses during the government planned domestic debt restructuring.

On 4 February 2022, Standard & Poor’s (S&P) maintained the

B- rating with a stable outlook, referring to Ghana’s strong growth prospects and flexible exchange-rate regime.

S&P rating agency on the 5^th August 2022 pushed Ghana’s debt into speculative territory, lowering its foreign and local currency sovereign ratings to CCC+/C from B-/B as result of deteriorating macroeconomic environment of high inflation, persistent depreciation of the local currency and weakening foreign currency reserves. S&P rating agency on the 21^st December, 2022 placed Ghana on default following the country’s suspension of debt repayment including interest payment and domestic debt restructuring. The default came because of very low foreign exchange reserves, a volatile foreign exchange rates, high inflation and weakened economy. This was after Ghana announced it domestic debt exchange program after the government admission of the country was a highly debt distressed economy.

In the last quarter of 2022, both Fitch, S& P and Moody’s all downgraded Ghana’s credit rating from B to B- with a negative outlook, and from B to Caa1 with stable outlook respectively. S&P however affirmed the rating at CCC and junk state with an unstable outlook. Ghana therefore remains at high risk of debt distress while at the same time in dire need of external financing for public services and infrastructure

11. Sovereign credit ratings in Ghana: The Table 1 shows the history of sovereign credit ratings from 2003- 2022

Agency	Rating	Outlook	Date
Moody's	Ca	Stable	Dec-22
Moody's	Caa2	Under Review	Oct-22
Fitch	CC	NR	Sep-22
Standard & Poor's	CCC+	Negative	Aug-22
Standard & Poor's	CCC	NR	Aug-22
Moody's	Caa1	Stable	Feb-22
Fitch	B-	Negative	Jan-22
Moody's	B3	Negative	Sep-21
Fitch	B	Negative	Jun-21
Fitch	B	Stable	Oct-20
Standard & Poor's	B-	Stable	Sep-20
Standard & Poor's	B	Negative	Apr-20
Moody's	B3	Negative	Apr-20
Fitch	B	Stable	Apr-20
Standard & Poor's	NR	NR	Feb-20
Standard & Poor's	B	Developing	Feb-20
Fitch	B	Developing	Feb-20
Fitch	B	Developing	Feb-20
Standard & Poor's	B	Developing	Jan-20
Standard & Poor's	B	Developing	Jan-20
Moody's	B3	Stable	Jan-20
Moody's	B3	Stable	Jan-20
Fitch	B	Stable	Oct-19
Fitch	B	Stable	May-19
Standard & Poor's	B	Developing	Mar-19
Fitch	B	Stable	Mar-19
Standard & Poor's	B	Stable	Sep-18
Fitch	B	Stable	Aug-18
Moody's	B3	Stable	Feb-18
Standard & Poor's	B-	Positive	Oct-17
Fitch	B	Stable	Sep-17
Fitch	B	Stable	May-17
Moody's	B3	Stable	Sep-16
Fitch	B	Negative	Sep-16
Fitch	B	Negative	Jul-16
Fitch	B	Negative	Mar-16
Fitch	B	Negative	Sep-15
Moody's	B3	Negative	Mar-15
Standard & Poor's	B-	Stable	Oct-14
Fitch	B	Negative	Sep-14
Fitch	B	Negative	Aug-14
Fitch	B	Negative	Jul-14
Moody's	B2	Negative	Jun-14
Fitch	B	Negative	Jun-14
Fitch	B	Negative	May-14
Fitch	B	Negative	Apr-14
Fitch	B	Negative	Mar-14
Fitch	B	Stable	Feb-14
Fitch	B	Stable	Jan-14
Standard & Poor's	B	Negative	Dec-13
Moody's	B1	Negative	Dec-13
Fitch	B	Stable	Dec-13
Fitch	B	Stable	Nov-13
Fitch	B	Stable	Oct-13
Fitch	B+	Negative	Aug-13
Fitch	B+	Negative	Jul-13
Fitch	B+	Negative	Jun-13
Fitch	B+	Negative	May-13
Fitch	B+	Negative	Mar-13
Moody's	B1	Stable	Dec-12
Fitch	B+	Stable	Aug-12
Fitch	B+	Stable	Jul-12
Fitch	B+	Stable	Sep-11
Fitch	B+	Stable	Sep-10
Standard & Poor's	B	Stable	Aug-10
Standard & Poor's	B+	Negative	Mar-09
Fitch	B+	Negative	Mar-09
Fitch	B+	Stable	Feb-08
Standard & Poor's	B+	Stable	Apr-06
Fitch	B+	Positive	Feb-06
Standard & Poor's	B+	Stable	Nov-05
Fitch	B+	Stable	Mar-05
Fitch	B	Positive	Dec-03
Standard & Poor's	B+	Stable	Sep-03

From the above Table 1 shows that S&P, Moody’s and Fitch have been providing sovereign credit rating facilities for various Governments of Ghana since 2003 and for which Ghana issued her maiden bond of US$ 750 million on the international capital market on 2007 with Fitch rating B+. All bonds issued including Ghana’s debut bonds on the international capital markets have been risk- rated either B+, or BB- and BB+ by Fitch, Standard and Poor’s or Moody’s.  

12. Findings.

From the varying S&P, Moody’s, and Fitch ratingmethodologiesshowed that the country was experiencing  of dwindled foreign exchange reserves, persistent depreciation of the local currency against major trading currencies like US$, Euro and UK pound sterling, high inflation, high fiscal deficit, current account deficits, high debt servicing obligations, the lack of the access to capital markets, shortfall in government revenues and an increase in expenditures associated with the pandemic, over-bloated government expenditures and the weakened economy which clearly allowed  Ghana to be classified as default. By 21^st December, 2022 Moody’s, Fitch and S&P rating agencies have placed Ghana on default following the country’s suspension of debt repayment including foreign debt interest payment and domestic debt restructuring. The default came because of very low foreign exchange reserves, a volatile foreign exchange rates, high inflation and weakened economy. This was after Ghana announced it domestic debt exchange program after the government admission of the country was a highly debt distressed economy. In the last quarter of 2022, both Fitch, S& P and Moody’s all downgraded Ghana’s credit rating from B to B- with a negative outlook, and from B to Caa1 with stable outlook respectively. S&P however affirmed the rating at CCC and junk state with a unstable outlook. Ghana therefore remains at high risk of debt distress while at the same time in dire need of external financing for public services and infrastructure

Credit rating agencies have been integral part of modern capital markets and their assessments on sovereign entities have been increasingly used as benchmarks by regulators and global investors. International credit rating agencies play a role in global financial markets by helping to reduce the information asymmetry between Government of Ghana and investors, on one side and issuer on the other side about the creditworthiness of country since 2007. All bonds issued including Ghana’s debut bonds have risk rated either B+, or BB- and BB+ by Fitch, Standard and Poor’s or Moody’s. The successful issuance of the various bonds was testament to investors renewed confidence as well as the positive ratings by three credit rating agencies. From empirical evidences based on both quantitative and qualitative data clearly showed that during the year 2022, Ghanaian economy was downgraded eleven times by the global credit rating agencies, Fitch, Moody’s and S&P as a result of dwindled foreign exchange reserves, persistent depreciation of the local currency against major trading currencies like US$, Euro and UK pound sterling, high inflation, high fiscal deficit, current account deficits, high debt servicing obligations, the lack of the access to capital markets, shortfall in government revenues and an increase in expenditures associated with the pandemic, over-bloated government expenditures and the weakened economy which clearly showed that Ghana was classified as default by credit rating agencies. From both quantitative and qualitative data review there are no evidence that S&P, Moody’s and Fitch have not been reckless in downgrading the Ghanaian economy eleven times in 2022. Exports of cocoa, gold and oil helped reduce the current account deficit from 3.2% of GDP in 2021 to 2.1% in 2022, more than offsetting the impact of rising imports.

However, intense balance of payment pressures resulted since Ghana was cut off from international capital markets, faced capital withdrawals and had trouble rolling over central bank foreign exchange liabilities. Gross international reserves fell to USD1.1bn (0.5 months of imports) at the end of February 2023, almost USD5bn below the level of mid-2021, largely due to foreign exchange interventions by the Bank of Ghana to reduce volatility. As a result of these factors, the value of the Cedi has dropped by more than -50% since the end of 2022. All the above findings confirmed that the three credit rating agencies were not reckless in their downgrading of the country’s economy in 2022. All the above findings confirmed that the three credit rating agencies were not reckless in their downgrading of the country’s economy in 2022. Those who claim that global credit rating agencies were bias against Ghana’s ratings by Fitch, Moody’s and S&P in 2022 must understand the approaches used to assess credit risks ranging from an investment grade (AAA, AA, A and BBB) to a non-investment grade (BB, B, CCC, CC, C and D) for Standard & Poor’s and Fitch and investment grade (Aaa, Aa, A) and Baa) to non-investment grade (Ba B, Caa, Ca and C) for Moody’s.

13. Conclusion

Ghana has experienced a low economic growth and this situation coupled with poor governance has resulted a rapid increase in government debt over the past five years with a debt a GDP ratio of close to 100%. Low economic growth and rising government debt are two key factors for risk ratings agencies and after two years of these conditions, it was no surprise that the sovereign risk rating was adjusted to sub-investment levels. This led to an outflow of capital from the country and domestic firms held back investments due to policy uncertainty especially with the recent domestic debt exchange. Government needs to clear all policy uncertainty as a matter of urgency, and this will encourage domestic firms specifically to invest in the economy. Accelerated economic growth would then assist government to collect more taxes and this could lead to a turn-around in the debt situation. The positive rating also found that domestic investment could encourage an increase in foreign direct investment (FDI). The improving economic situation and government debt environment would allow risk ratings agencies to adjust the risk level of the country upwards. Economic growth and investment need to be stimulated to revive its government debt position and return its credit ratings to investment grade. By achieving investment-grade ratings, will increase investment inflows into Ghana, thus putting the government in a position where its economic conditions will improve. Key strategies need to be developed and directed towards various investment in the agricultural sector and development projects like road networks, railway systems and incentives, both domestically and internationally, to improve the country’s sovereign credit rating.