GH¢500m bond sale sparks debt controversy
Government’s attempt to raise GH¢500 million (US$127.2 million) through the issuance of a five-year bond to restructure its debts and support the 2016 budget has sparked concerns over the rising levels of interest payments.
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The bond sale will mainly target institutional investors and offshore buyers, according to the Bank of Ghana issuance calendar.
Though there are no details on pricing, analysts say the country’s interest rates are among the highest in the region, reflecting the fiscal challenges it faces. The yield on its benchmark 91-day treasury bill stood at 22.8160 per cent on June 17.
This time, analysts expect an improved participation from non-resident investors compared to the disappointing outcome for the two-year Note (two weeks ago) as the rate-neutral decisions in the US and the UK imposes relatively low returns despite elevated risks from Brexit.
Analysts say, even without new borrowing, the country will pay about US$1.2 billion in debt service costs as foreign debt balloons to about US$22 bn, double the level of five years ago.
A senior economist at Databank, Mr Courage Kingsley Martey, expects the government to pay a premium price on the bond since investors perceive little incentive to immediately move away from the shorter end of the fixed income market.
“With a yield of at least 24.5 per cent per annum on a six-month treasury security, there is little incentive for the investor to substantially diversify into longer-dated instruments which offer equivalent returns”, the senior economist said in an interview.
He said investors largely believed that the 24.5 per cent return on six-month securities provides the dual benefits of similar returns on the longer-dated securities as well as flexibility of a six-monthly re-appraisal of investment strategies compared to the prevailing economic situations and changes in the outlook.
Book building approach
Mr Martey, however, lauded the government's decision to revert to using a book-building system for this issue rather than the auction system used for the last three-year bond.
That, he said, could increase investor participation for this issue as it involves a lot more engagements and interactions with investors to emphasise the country's biggest selling points, thereby easing investor concerns.
Analysts say if the government is able to raise sufficient funds at a cost below 24.5 per cent, then it would be financially prudent to use the proceeds to refinance the 182-day bills which tend to cost the government more than 24.5 per cent at present.
This would essentially mean that the government would be replacing expensive debts with relatively less expensive debts, a strategy that would be consistent with the government's Medium Term Debt Management Strategy to restore debt sustainability.
The impact on the government debt portfolio would depend on the use of the bonds proceeds.
If the government uses the funds to refinance maturities on the shorter end of the debt market as expected, then the impact on the debt ratio should be negligible.
However, if the government uses the proceeds significantly in other projects, while maintaining its indebtedness on the shorter end of the curve, this would significantly add to the debt position.
Public debt and inflation
The country turned to the IMF for help to fix an economy dogged by a high public debt and inflation, securing a 3-year assistance programme.
Ghana raised GH¢746.4 million (US$193 million) in a similar local bond transaction in March for a yield of 24.75 per cent. It has also issued several other securities, including ones of 3-year maturity.
The government also has plans to issue Eurobonds of up to US$1 billion, amid concerns from the IMF about the country's public debt, which stood at US$26.3 billion, or 70 per cent of GDP, at the end of December.
The government has appointed Standard Chartered Bank, Citibank and Merrill Lynch as advisors for the Eurobond, the fifth since the country's 2007 debut.
Turnaround story
The Finance Minister, Mr Seth Terkper, has been running a roadshow for investors under the hopeful title of 'Ghana's Turnaround Story' and proclaiming a 'firm commitment to fiscal consolidation' and 'sound debt management'.
In his version, the weak economy was caused not by bad policy, mismanagement and rent-seeking but simply by commodity price crashes.
The 2015 budget was premised on a price of US$99 for each barrel of oil that the country exported, though this year the government wants to cut that to US$35-40 a barrel and a fall in the gold price from about US$1,800 an ounce in 2012 to about US$1,000/oz at the start of this year.
But the market does not seem to buy the turnaround story. The costs of floating a US$1bn. bond in the near future look prohibitively expensive for the country.
In January, the IMF set out fresh debt limits – US$1bn for a Eurobond and other non-concessional borrowing and up to US$150 million for a semi-concessional loan from the World Bank. 'Ghana's risk of debt distress remains high,' it warned.
