There are fears that the government will be paying a heavy price should it proceed to raise its third Eurobond next month due to the country’s deteriorating fiscal situation.
Ghana plans to brave into the sovereign bond market in September this year to raise some US$1.5 billion to pay maturing debts and to bridge the infrastructure deficit.
The third excursion into the international capital markets comes at a time when the country is facing mounting economic challenges.
Head of the Economics Department of the University of Ghana, Professor Peter Quartey, is concerned about the country’s debt sustainability indicators and the interest cost the country will be paying for the bond.
“The timing is not appropriate, but the financial challenges make the situation ideal,” Professor Quartey said in a telephone interview with the Graphic Business.
He said an International Monetary Fund (IMF) bailout would have been the most appropriate, but since that had been ruled out by the government, the Eurobond market remained the next available option but cautioned about what he described as a heavy price the country might pay.
With investors being more cautious about lending to frontier countries with shaky finances following last year’s violent market rout, Ghana will most likely pay a premium of between nine to 10 per cent to get the deal off the ground, analysts say.
Finance Minister, Mr Seth Terkper, had said at a news conference after the presentation of the supplementary budget to Parliament in July that Ghana was returning to the sovereign bond market to refinance a 10-year bond and pay for infrastructure projects.
“We want to finance our capital budget with long-term instruments,” he said. “One reason for the [fiscal] deficit is the high interest rates we are paying to finance capital projects” with short-term debt, he said.
Testing investor confidence in Ghana
Analysts say the bond would test the appetite of investors for a country that is battling with high fiscal deficits and rapidly rising debt levels at the same time as the US Federal Reserve “tapers” its monetary stimulus.
Ghana, in 2007, was the first Sub-Saharan African country after South Africa to tap the sovereign bond market, raising US$750m through a 10-year bond at a yield of 8.5 per cent.
The country tapped the market again in 2013, raising another US$1bn with a 10-year note at an interest rate of 7.875 per cent.
Though the government had hired Barclays, Deutsche Bank and Standard Chartered to manage the issue, it has not decided whether it would issue a single bond, or split the issuance into two 5 and 10-year notes.
But Professor Quartey’s colleague at the Institute of Statistical, Social and Economic Research (ISSER), Dr Robert Darko Osei, was even more critical, saying: ‘the timing is wrong.’
The ISSER fellow wants the government to sanitise the country’s fiscal situation in order to give the business community some confidence.
“I am concerned about the price we will have to pay for this bond,” adding that: “The outlook looks bad, making the country more risky and the more risky you are, the higher the interest you pay.”
“The timing is simply inappropriate,” Dr Osei said in a telephone interview with the Graphic Business.
He said some of the fiscal problems were self-imposed and suggested to the government to improve the efficiency of public spending.
The fiscal challenges
Nearly four years after the start of oil production, which was meant to further strengthen the fiscal position, the public purse is looking empty.
Ghana is battling a double-digit fiscal deficit after a 75 per cent hike in public salaries over two years. On top of it is the worsening inflation situation which is now in double digits after staying single for many months, the first in recent history.
The local currency, the cedi, has lost nearly a third of its value against the dollar since January.
But Mr Terkper, on July 16, cut the government's 2014 growth target and forecasted a wider budget deficit and higher inflation, citing falling revenues, the slide of the cedi and declining gold prices.
The country is paying interest of 20-25 per cent for short-term debt issued in local currency. If the hard currency bond issued earlier this year by Zambia serves as a guide, both countries face fiscal challenges and Ghana is likely to pay between 9 to 10 per cent for a US dollar denominated bond.
The two countries also face similar problems largely due to politically driven increases in public sector salaries – and a swelling current account deficit that is pressuring the exchange rate.
The prospects of the cedi
Ghana's cedi could begin a gradual recovery against the dollar in the coming weeks on offshore greenback sales, boosted by expected Eurobond and cocoa inflows.
The local currency has remained stable in the past few days after plunging about 30 per cent in the first half of the year due to a shortage of dollars and concerns over a weak economy. It was trading at 3.0350 to the dollar at 1220 GMT on Friday August 1, 2014.
Analysts forecast depreciation at a significantly lower pace in the second half of the year as cocoa inflows kick in.
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