Moody's: Ghana and Mongolia's Commodity Dependence Strains Weak Credit Profiles

Moody's Investors Service says that the credit profiles of Ghana and Mongolia - both rated B2 with negative outlooks - are constrained by their exposure to commodities, strained public finances and external vulnerabilities.

Ghana's high debt and deficit levels are a key drag on its credit quality, while Mongolia's elevated vulnerability to external risks and weak governance are its primary rating constraints--both sovereigns were downgraded by one notch in 2014.

Moody's conclusions were contained in a just-released report, "Ghana, Government of and Mongolia, Government of: Commodity Dependence Strains Weak Credit Profiles".

The two countries have abundant natural resources that have attracted high levels of foreign investment and have produced rapid economic growth. However, dependence on natural resources has exposed both economies to volatility in commodity prices and shifts in investor sentiment, undermining growth prospects in both countries and straining government finances.

In addition, downward pressures on exports and capital inflows have reduced foreign-exchange reserve buffers. Unpredictability in the policy environment has weighed on economic growth more in Mongolia than in Ghana.

While both countries will face heightened external pressures from sovereign bond repayments in the coming years, falling commodity prices will hurt Ghana more than Mongolia, given the former's position as a net oil exporter. But Mongolia's external risks are more pronounced due to a sharp drop in foreign direct investment over the last year.

Weak fiscal management is also a shared credit risk, but while Mongolia's fiscal performance is strongly correlated with commodity cycles, Ghana's public finances outcomes are more closely tied to electoral cycles.

Moody's further notes that Ghana's public finances are more strained, as seen in its much heavier debt burden and weaker debt affordability metrics. In the case of Mongolia, interest payments comprise a lower 4.5% of revenues, versus 23% for Ghana -- but this relative strength is diminishing as interest payments rise and mineral and corporate tax revenues decline.