Fitch Ratings has downgraded Ghana's Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to 'C' from 'CC'. The issue ratings on local-currency bonds issued domestically have also been downgraded to 'C' from 'CC'. Fitch has affirmed Ghana's Long-Term Foreign-Currency IDR at 'CC'. Fitch typically does not assign Outlooks to sovereigns with a rating of 'CCC+' or below.

Key Rating Drivers

LC Debt Restructuring Announced: The downgrade of Ghana's follows the government's announcement of a formal invitation to exchange local-currency debt. Fitch deems this to be the initiation of a default-like process, consistent with a 'C' rating.

Invitation to Exchange LC Debt: On 5 December, the government of Ghana published an Exchange Memorandum inviting eligible holders of local-currency domestic debt to exchange their existing bonds for new bonds. These new bonds will pay significantly lower coupons, with 0% coupon in 2023, rising to 5% in 2024 and to 10% from 2025 onwards, and effectively extend maturities for eligible outstanding local-currency domestic debt. The restructuring comes in the context of efforts to secure IMF support and a local-currency restructuring seems to constitute a necessary prior action.

LC Exchange Qualifies as DDE: In Fitch's view, the debt exchange constitutes a distressed debt exchange under the agency's criteria, given that it entails a material reduction in terms and is needed to avoid an outright default. Fitch will downgrade the LTLC IDR to 'RD' after completion of the debt exchange, which the government currently expects on 20 December. The IDR could then be upgraded to a rating appropriate for Ghana's prospects on a forward-looking basis, but the LTLC IDR would be constrained by the fact that the foreign-currency debt situation would still need to be cleared.

Foreign-Currency Debt Not Yet Affected: The government also announced that it is preparing a restructuring of its external debt to restore debt sustainability. Fitch downgraded Ghana's rating to 'CC' on 23 September to indicate the increasing likelihood of a default event as a result of these pressures and in anticipation that an IMF-supported macroeconomic reform programme would require some form of debt restructuring. Ghana's already-high debt servicing burden and constrained access to finance both worsened during the successive shocks of the coronavirus pandemic and the Ukraine-Russia war, leading the government to seek IMF support in July 2022.

Partially Guaranteed Note Expected to Be Excluded: We have affirmed the rating on Ghana's partially guaranteed notes backed by the World Bank's International Development Association as the notes are expected to be excluded from an external debt restructuring even if other Eurobonds are included.

ESG - Governance: Ghana has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Ghana has a medium WBGI ranking at 50.8 reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

ESG - Creditor Rights: Ghana has an ESG Relevance Score (RS) of 5 for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The current rating action reflects Fitch's view that a default event is imminent.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-Completion of the proposed debt local-currency exchange would lead to a downgrade of Ghana's LTLC IDR to 'RD'.

- Failure to make scheduled coupon or maturity payments on Ghana's foreign-currency bonds within the grace period would lead to a downgrade of Ghana's LTFC IDR to 'RD'.

- Signs that the partially guaranteed notes might be included in a restructuring could lead to a downgrade of their rating.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Withdrawal of the local-currency debt exchange offer and payment of upcoming coupon payments within stipulated grace periods.

- Evidence that foreign-currency debt would be excluded from the overall effort to address Ghana's debt pressure could lead to an upgrade of the LTFC IDR and affected issuances.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch's proprietary SRM assigns Ghana a score equivalent to a rating of 'B-' on the Long-Term Foreign-Currency IDR scale. However, in accordance with its rating criteria, Fitch's sovereign rating committee has not utilised the SRM and QO to explain the ratings in this instance. Ratings of 'CCC+' and below are instead guided by the rating definitions.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance

References for Substantially Material Source Cited as Key Driver of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Ghana has an ESG Relevance Score of '5' for Political Stability and Rights as WBGIs have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Ghana has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Ghana has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption, as WBGIs have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Ghana has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Ghana has an ESG Relevance Score of '5' for Creditor Rights, as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The imminent prospect of default reflected in the 'C' LTLC IDR has a negative impact on the credit profile.

Ghana has an ESG Relevance Score of '4[+]'for Human Rights and Political Freedoms, as the Voice and Accountability pillar of the WBGIs is relevant to the rating and a rating driver. As Ghana has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.