Bond sale sparks fears of exchange rate shocks
Concerns over the huge foreign dominance in the country’s recent uptake of $2.25 billion in offshore bond transaction have sparked fears of imminent exchange rate shocks when investors withdraw from the market.
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Ghana sold GH¢ 3.42 billion (US$790 million) of a 15-year debt and a fresh seven-year paper worth GH¢ 1.45 billion (US$335 million) at a costly 19.75 per cent, each a far higher yield than the country hoped to pay.
It also re-opened existing 10-year and five-year bonds of which it sold more than US$1 billion in a book-building transaction led by Barclays Bank Ghana.
The bond was largely purchased by offshore investors indicating renewed investor confidence in the medium to long-term prospects of the economy.
The International Monetary Fund has repeatedly warned African governments about the risks they face by taking on too much debt.
Disguised foreign debt
A Senior Economist at Databank, Mr Courage Kingsley Martey, in an interview, April 7, described the large foreign participation in the domestic debt as a "disguised foreign debt".
He said the repatriation of coupon earnings and liquidation of principal in the medium-term based on sudden change in sentiments could shock the Cedi and undermine the exchange rate stability in the absence of a robust reserves of foreign currency to meet the resultant foreign exchange demand.
The economist said the offshore investor’s net return on investment after accounting for possible foreign exchange risk should be, at least, the same as holding any of the country’s outstanding Eurobonds.
An economist and the Head of Finance at the University of Cape Coast, Dr John Gatsi, the agrees that the large foreign participation can lead to a foreign exchange shock.
“That is the problem with bond issuance,” he added but cautioned that the move of funds by investors depended on the outlook in the global market.
Governments that used global investors’ hunger for yield to tap international capital markets for record sums of debt now face sharply higher borrowing costs as the slowdown in China’s economy and collapse in commodity prices make frontier market debt less palatable to investors.
“If the global outlook remains unstable, investors will move their funds, where they can get higher returns,” he said.
Medium-term risk
They suggested that the sustainable solution to mitigate the medium-term risk would be for the government to accelerate its industrialisation agenda and export diversification strategy to boost. The country’s foreign exchange earning capacity in the medium term, supporting the available reserves of foreign currency to manage any exchange rate shocks in the medium term.
Ghana, previously one of Africa’s best performing economies, is now regarded as a cautionary tale for other natural resource dependent emerging economies.
The government aims to restore rapid growth in a country that had one of the hottest economies in Africa driven by exports of gold, oil and cocoa. Growth slowed in 2014 due to a fiscal crisis and a slump in global commodities prices.
The country’s over-extended borrowing during the commodity boom weakened its fiscal position to breaking point once the downturn began last year, leaving it in need of a $1 billion rescue loan from the International Monetary Fund.
The Minister of Finance, Mr Ken Ofori-Atta, said in a statement that the issuance proceeds would be used to repurchase and/or retire a portion of the higher coupon short-term public debt instruments. This means that there will not be an overall increase in the total debt stock.
Mr Ofori Atta said the pricing obtained was also consistent with the initial price range of 18.95 per cent - 19.85 per cent.
“The issuance attracted a number of global portfolio investors including a very substantial investment in the 15-year bond by a very well respected global financial investor,” he said.
“This is in line with our liability management strategy which seeks to re-profile our public debt stock, extend tenors, reduce short-term rollover pressures, and lower domestic interest cost,” he added.
The Finance Minister is confident that the issuance will further help improve the country’s foreign exchange reserves by over USD2 billion and further support the cedi.
“This is an indication of the market’s belief in our commitment to building an effective public financial management system, improve the country’s debt sustainability outlook and mitigate the crowding out of the private sector.
“It is imperative that we re-profile our total debt stock of USD30 billion which should help put us on a path of ‘Ghana beyond Aid’, the Finance Minister boasted.