Debt restructuring measures must be transparent - Economist
The country needs a genuine and urgent debt restructuring programme to enable it to avoid a default, an economist, Dr Said Boakye, has said.
Dr Boakye, however, said the restructuring must be credible and transparent to help gain the support of creditors and also mitigate the spillover effects on the economy and the country at large.
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If possible, it should also be anchored around a debt forgiveness initiative to make it more broad based and effective, the Head of Research at fiscal policy institute, the Institute for Fiscal Studies (IFS), told the Graphic Business on September 26 on the back of speculations that the Bretton Wood institution, International Monetary Fund (IMF) is pushing for debt restructuring by the government ahead of the bailout negotiations which began yesterday.
For the domestic market, a typical debt restructuring programme involves the government asking holders of treasury securities, including bonds to either continue to rollover, forfeit their interest or take a lower yield upon maturity.
It could also include a combination of all or some of the above.
Implications
While welcoming a restructuring, Dr Said warned that a debt restructuring could cost banks and holders of treasury securities revenue, leading to reduced profits.
The country’s debt peaked at GH¢393.4 billion in June this year, equivalent to 78.3 per cent of GDP.
Of the amount, domestic debt was GH¢190.1 billion.
Banks and other financial institutions currently lead the pack in the domestic debt mark, holding about 55 per cent of the securities.
Individuals hold about 12.6 per cent of the government paper, making them the second largest holders.
The remainder is held by foreign investors, pension funds and rural banks, among others.
Downgrade
Dr Boakye was commenting on the recent downgrade of the economy by international credit ratings agency, Fitch Ratings, over concerns of an imminent debt default.
Fitch lowered the country’s sovereign ratings from CCC to CC on September 23 in what is now the lowest credit score for the economy in the country’s history.
It said the downgrade reflected the increased likelihood that Ghana would pursue a debt restructuring, given mounting financing stress, with surging interest costs on domestic debt and a prolonged lack of access to Eurobond markets.
“There is a high likelihood that the International Monetary Fund (IMF) support programme, currently being negotiated, will require some form of debt treatment due to the climbing interest costs and structurally low revenue as a percentage of gross domestic product (GDP).
“We believe this will be in the form of a debt exchange and will qualify as a distressed debt exchange under our criteria,” the agency said.
The government is yet to comment on Fitch’s ratings, which came on the back of increased reports on ongoing discussions for a debt restructuring.
Genuine restructuring
Dr Said explained that discussions around the restructuring were welcome although he cautioned that it should be pursued immediately to help create the needed fiscal space for a quicker correction of public finances.
“Genuine restructuring of the debt is needed. Yes, the ratings agencies will rate you badly that you are now in a state of default but we need to be able to take the bitter pill to be able to improve upon our finances in the future,” he said in the interview.
“With the state that the economy is in now, on our own, we cannot be able to solve it and that is why the restructuring is the way to go now,” he added.
He, however, explained that a successful debt restructuring would impact negatively on individuals and institutions, given that people and institutions could lose money.
Nature
Dr Said said although the details of a debt restructuring were not readily known, it was emerging that institutional holders of the government debt could be asked to continue rolling over.
“What I am beginning to hear is that they will be interested more on the maturing debts.
“Usually, the government borrows from the market to pay for those maturing debt but now they can negotiate with the banking sector, pension and insurance companies such that they will continue to hold them.
“When that is agreed, then they can negotiate about the interest to be paid to minimise the interest payment,” he said.
The economist said the situation could be dicey, given the current structure of the banking sector.
“For the foreign banks, it is almost like foreign debt and they may not have enough sympathy as the local bank will and so all these will play out during the discussions,” he said.
He further called for patience and transparency, noting that those were needed to make things easier in any debt restructuring programme.