Ghana Rages Against the Rating Agencies: G20, Take Notice

The Ghanaian government recently appealed Moody’s decision to downgrade its credit rating. Moody’s downgrade to CCC—implying a heightened vulnerability to default—prompted some of Ghana’s sovereign bonds to fall by 3.4 cents on the dollar, likely shutting the country out of international capital markets.

And while Fitch had lowered Ghana’s rating in January, S&P opted to maintain its B-rating with a stable outlook pointing to Ghana’s solid growth prospects over the coming years. These divergent actions—and strong market reactions—are a reminder of the tremendous weight that investors put into assessments that can be subject to methodological fallibility, ideological rigidity, and human error. It is also a reminder of the fine line credit rating agencies (CRAs) walk between sounding alarm bells and setting fires.

In a press release issued in response to Moody’s decision, the Ghanaian Finance Ministry highlighted the weaknesses and contradictions in the evaluation before issuing a clarion call for rating agency reform:

“We are gravely concerned about what appears to be an institutionalized bias against African economies […] as credit rating analysts assume highly conservative postures and low risk tolerance for African sovereign credits with little regard for the adverse impact on the cost and access of financing for African Sovereigns.”.

Ghana was hit hard by the COVID pandemic, with growth slowing to 0.4 percent in 2020. It also mounted one of the most effective policy responses in sub-Saharan Africa. But this came at a cost: public-sector debt rose from 63 percent of GDP in 2019 to 79 percent of GDP in 2021, with external debt jumping from 39 percent to 44 percent of GDP over the same period. The IMF has recognized that this fiscal expansion could likely pay off for Ghana, with the country now poised to recover faster and avoid the profound scarring other countries in the region are experiencing. Case in point: the IMF forecasts that growth could reach 6.2 percent in 2022. But Ghana’s recovery is fragile, and a lot hinges on the successful implementation of its fiscal consolidation plan. Finding itself locked out of capital markets could derail the country’s economic recovery with nearly $800 million in foreign currency debt coming due to bondholders over the next two years, a non-trivial risk the IMF underscored the country’s most recent Article IV consultation.

Sub-Saharan African countries have faced a record number of downgrades since the COVID-19 crisis began. According to a UN study, 41 percent of sub-Saharan African rated sovereigns were downgraded at least once between February 2020 and March 2021, the highest regional average, compared to only 6 percent of advanced economies. The result was that not a single country in sub-Saharan Africa was able to issue a Eurobond for the vast majority of 2020. As sub-Saharan Africa was locked out of the market during the beginning of the pandemic, the rest of the world—Asia, Europe, the Americas—embarked on a period of unprecedented borrowing. An African Union report found that in a majority of downgrades, rating agencies warned African countries against adopting large pandemic stimulus packages. In short, CRA analysis put countries in a straitjacket resolutely at odds not only with IMF policy prescriptions (recall: “spend as much as you can, but keep the receipts”), but with G20 exhortations.

To give poor countries some fiscal breathing room, the G20 launched the Debt Service Suspension Initiative (DSSI). This initiative was intended to temporarily postpone debt service payments for countries that requested it on a net present value neutral basis (meaning the creditor would not incur a loss). Countries could then use the savings to invest in the pandemic response. In addition, it had the added benefit of preventing short-term liquidity crises from turning into costly solvency crises. But finance ministers were reluctant to ask their private creditors for forbearance, especially after it became clear that the CRAs would treat such a request as a credit event. The DSSI initiative ultimately suffered a death by a thousand cuts, but the absence of private creditor participation was the coffin nail. And this seems headed for a repeat with the G20’s Common Framework Initiative for Debt Treatments, given that Moody’s placed Ethiopia on review for participating.

As sub-Saharan Africa was locked out of the market during the beginning of the pandemic, the rest of the world embarked on a period of unprecedented borrowing.

The world’s poorest countries are entering a period of heightened risk. The US Federal Reserve has already announced its intention to raise interest rates this year that could usher in a major global risk rebalancing act. Under tightening liquidity conditions investors will be in search of safe havens and less hungry for yield. And many African countries that have benefited from a benign interest environment for over a decade could be in for a rude awakening. There are calls for some countries—already pre-emptively dubbed “Africa’s fragile five”—to avoid postponing decisions to default. But many frontier countries could easily find themselves in a “damned if you do, damned if you don’t scenario,” with external market access restricted regardless of their choice. For many African sovereigns, a one notch downgrade from a CRA is enough to send financing costs soaring.

This is a lot of power for unaccountable private entities. And it should raise fundamental questions for international economic policymakers: are they comfortable with the CRA’s role in global economic policy? Is a fairer international financial regime possible?

There is not a dearth of ideas for a different approach. When the G20 finance ministers meet later this week they should dust off some of the reform proposals that emerged in the aftermath of the global financial crisis. A modest starting point could be to announce a process to flesh out a mechanism for a future debt moratorium that involves the private sector while insulating participating countries from a downgrade. Or they could resurrect a 2010 proposal from the Financial Stability Board to reduce reliance on external credit ratings. Or they could go really big and put on the table a new independent global public rating agency, an idea whose time may finally have come.

As Keynes once wrote “markets can stay irrational longer than you can stay solvent.” It's time for the G20 to fight back.