Credit rating downgrades have bad implications on stock market – Analyst

Gifty Annor-Sika Asantewah, a financial analyst and advisor to Geldex Invest, has predicted that the downgrade of Ghana by the major rating agencies has the tendency of affecting the stock market performance as non-resident investors will react to the downgrade.

The Analyst, who made this known in an interview with Vaultz News said, the downgrade of Ghana’s sovereign credit rating since January 2022 has led to investor reaction which led to non-resident investors prematurely leaving the stock market and as such, the latest downgrade will only worsen the situation.

“The downgrade by these ratings agencies is a bad news to the stock market. It will adversely affect the market as non-resident investors will prematurely exit the market as seen in the beginning of the year when the major downgrade happened. When they decide to leave, they sell off their shares and that puts pressure on share price and send it heading southward and in the process affect the stock market negatively. So, yes the downgrade has derating implications for the market” she said.

The analyst noted that the stock market is already suffering from the changing macro backdrop with heightened worries about surging inflation, depreciation, the Russian-Ukraine war and to some extent the COVID-19, and liquidity tightening has been giving sleepless nights to traders.

“Traders’ worries are also exacerbated by the unfavorable economic environment in the country and that is putting a significant drag on investors.”

Ms Annor-Sika explained that the effect of rating changes on share prices depends on the pre and post-change rating level, noting that the lower the previous rating, the larger the impact on prices.

“Since the previous rating level itself can be considered a measure of credit risk, this is why downgrades have so far shown a larger impact on prices. Due to an intrinsic feature of rating distributions, downgrades occur more often for companies and countries that were previously worse off than the ones that receive upgrades, as companies that receive rating upgrades are generally at better credit risk levels, and the associated abnormal return is lower, but the opposite holds for Ghana.”

More Effects

On the effect on the economy when investors decide to leave the market prematurely, the analyst indicated that when they decide to leave, the Bank of Ghana (BoG) has to provide dollars for them to exit the market and this exerts enormous pressure on reserves, causing the cedi to depreciate.

“Because these investors trade in local currencies, a decision by the non-residents not to roll over results in the Central Bank providing for dollars to help externalize these funds, a situation which puts pressure on the currency. This adds another layer of demand pressure from non-residents and hence causing the cedi to depreciate.”

Ms Annor-Sika Asantewah added that the downgrade has led to loss of external financing.

“With rating agencies downgrade, Ghana was not able to tap the Eurobond market. Over the past three years Ghana has consistently raised US3 billion from the Eurobond market to help finance the budget. We are not able to access the market this year due to our tendency of debt default. This means that there is no new fresh injection of capital and this has created FX supply problem and affected the ability of the Central Bank to provide for greater support for the cedi. Fitch estimates our debt servicing for 2022 at $2.75billion and $ 2.8billion in 2023. This is huge for our economy and we are clearly on a downward spiral.”

That notwithstanding, the analyst expected the market to begin picking up in the not distant future as the government is working hard to revive the economy.

“While I expect strong cyclical and profit recovery next year, I think the recovery will start after the IMF Program negotiation is finalized. So, taken together, I think the Ghanaian market could consolidate over the next 4-6 months on the broader region… I would suggest investors focus on intermarket opportunities.”