Sub-Saharan African countries are facing a funding squeeze due to persistent global inflation and tighter monetary policies, resulting in higher borrowing costs and pressure on exchange rates.
The interest burden on public debt is increasing due to a reliance on expensive market-based funding and a long-term decline in aid budgets.
This lack of financing is exacerbating macroeconomic imbalances, with high levels of public debt and inflation, and a significant number of people experiencing acute food insecurity.
The economic recovery has been interrupted, with growth expected to decline to 3.6 per cent in 2023.
The funding squeeze may force countries to reduce resources for critical development sectors, weakening the region’s growth potential.
To address macroeconomic imbalances, policymakers need to consolidate public finances, contain inflation, allow the exchange rate to adjust, and ensure that climate change efforts do not crowd out basic needs such as health and education.
International assistance remains critical to alleviating financing constraints.
According to the 2023 International Monetary Fund Regional Economic Outlook Report (Sub-Saharan Africa), Ghana’s net international reserves are expected to reach a concerning level of only three weeks of import cover by the end of 2023.
This forecast contrasts sharply with the Bank of Ghana’s Summary of Economic and Financial Data, which estimated the country’s import cover at 2.7 months.
The significant discrepancy raises alarms as it implies that Ghana’s economy could face serious trouble if foreign inflows were to halt abruptly.
This is because the country’s reserves currently hold only a few dollars for balance of payment transactions.
Among sub-Saharan African countries, Zimbabwe, South Sudan and Ethiopia are the only nations expected to record import cover lower than Ghana.
In February 2023, Ghana stood out among sub-Saharan African countries with its significantly higher inflation rate of 54.2 per cent, compared to the regional median of about 10 per cent.
Additionally, while roughly half of the countries in the region recorded double-digit headline inflation, Ghana’s inflation rate was more than five times higher. Similarly, while around 80 per cent of countries experienced double-digit food inflation, Ghana’s food inflation rate was over 50 per cent.
However, the recent deceleration of fuel prices due to international price drops of up to 30 per cent since mid-2022 has provided some relief to the region.
Interest payments to revenue, excluding grants
In 2022, Ghana was burdened with significant interest payments, spending around 45 per cent of its revenue (excluding grants) to cover these costs, ranking the highest in sub-Saharan Africa.
This is significantly higher than the median sub-Saharan African country, which spent around 11 per cent of revenues on interest payments.
The increase in borrowing costs in the region can be attributed to various factors, including a decline in aid budgets and a greater reliance on more expensive market-based finance.
Additionally, increased integration in international debt markets and deepening of domestic financial markets have made it easier for countries such as Ghana to contract more private domestic and external debt on non-concessional terms.
While inflows from China were once a significant source of financing, they have declined markedly in recent times.
Public debt as a share of GDP
In 2022, sub-Saharan Africa’s public debt ratio stood at 56 per cent of GDP, but in Ghana, it was significantly higher at 104 per cent of GDP. This marks levels not seen since the early 2000s.
The pandemic has contributed to the rise in public debt, driven by fiscal deficits resulting from overlapping crises, slow growth and exchange rate depreciations.
This increase in public debt levels has sparked concerns about debt sustainability, with 19 of the region’s 35 low-income countries already in debt distress or facing a high risk of debt distress in 2022.
In response, Ghana announced its debt restructuring in December 2022.
In 2022, most currencies in sub-Saharan Africa experienced depreciation against the US dollar, with an average of about 17 per cent.
However, Ghana’s currency depreciation was much higher, at over 50 per cent. Only Ghana and Zimbabwe had their currency depreciated over 50 per cent between September 2022 and April 2023.
This was particularly problematic for those already facing high inflation such as Ghana, which was 54.8 per cent at the end of the year, as the region relies heavily on imports, with a significant share invoiced in dollars.
As of 2021, around 40 per cent of the region’s debt was external, and currency depreciation contributed to higher general government debt.
Despite some easing of exchange rate pressures since November 2022, they still remain elevated and volatile.
Despite facing a challenging economic environment, sub-Saharan Africa is expected to experience a decline in growth in 2023, with the IMF forecasting a decrease from 3.9 per cent in 2022 to 3.6 per cent.
However, the situation is even more subdued for Ghana, which is categorised as a resource-intensive country.
The IMF has revised its growth forecast for Ghana from 2.8 per cent to 1.6 per cent for 2023, marking the second year of growth slowdown for the country.
This is in contrast to neighbouring non-resource-intensive countries such as Benin, Togo and Ivory Coast, which are expected to grow between 5.5 to 6 per cent.
The rise in central bank policy rates to fight inflation and debt default is a common factor contributing to the growth underperformance across the region.
Despite this, some countries, such as Niger, the Democratic Republic of the Congo and Senegal, are expected to experience higher growth due to the coming online of oil and gas.
However, Equatorial Guinea is projected to experience significant economic contraction due to a decline in oil production.
Overall, Ghana’s high inflation, debt crises and economic mismanagement do not bode well for the country’s economic outlook.
• Not all parameters are known, but eurobond-debt reduction targets are likely to be very ambitious.
Ghana’s authorities have indicated that to comply with IMF targets, a 16 per cent-of-GDP NPV reduction of external debt by 2028 may need to be achieved in the upcoming restructuring.
We estimate that this would translate into an ambitious c.55 per cent NPV reduction for eurobond debt.
• The difference between the five per cent discount rates used by the IMF and likely market-based exit yields may skew bondholders’ preferences towards larger upfront notional haircuts, relative to larger coupon cuts and maturity extensions.
At the same time, maturity and coupon adjustments will also need to be part of an overall solution to provide near-term liquidity relief and to smoothen the debt profile.
• We provide an illustrative example that we believe broadly achieves the outlined targets and results in a recovery value for bondholders in the low 40s.
This implies some upside from current market prices, which could be enhanced if negotiations provide leeway around the targets, or if any additional recovery value instruments are introduced contingent on Ghana’s future economic performance.
However, a speedy process allowing investors to realize the potential upside is of the essence, and risks to this are non-negligible.