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Suspend Eurobond floatation -Dr Abbey

BY: Arku Jasmine

Executive Director of the Centre for Policy Analysis, (CEPA), Dr J. S. L.  Abbey has cautioned the government to postpone its planned mid-year flotation of a billion dollar sovereign bonds.

Dr Abbey fears that a rush into the international market to sell another sovereign bond may be unsuccessful due to the country’s deteriorated fiscal deficit.

The Graphic Business last week reported of Ghana’s plan to float a second Eurobond worth up to US$1 billion to refinance debt and fund infrastructure projects.

President John Dramani Mahama has said at the Times Africa CEO Summit in London that, “We are floating the bond to pay down some very high interest credit from the domestic market, to bring down our interest payments, and to bring the deficit back on track”.

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But the CEPA boss is not happy about the timing of the flotation. He wants the government to hold back the road show to the later part of the year when the economic environment improves.

He has consequently sent a letter to the Ministry Finance cautioning of the timing of the issuance of the bond.

Dr Abbey’s major worry is over the country’s current ratings, which he says may not whet investor appetite for Ghana’s bond.

Ghana’s credit rating outlook was lowered to negative by Fitch Ratings after a “severe deterioration” in the country’s budget deficit, which widened to 12.1 per cent of gross domestic product last year. 

In 2007 Ghana relied on positive assessments by ratings agencies to sell its debut US$750million Eurobond. Standard & Poor’s and Fitch Ratings had rated Ghana B+ with a stable and positive outlook respectively, ahead of that bond sale, which was oversubscribed by almost 400 per cent.

For now, rising borrowing costs have pushed the government’s debt to 47 per cent of GDP in 2012, up from 31 per cent in 2008, Fitch said. That’s above the median of 44 per cent for countries rated B, it said.

The CEPA boss remains skeptical about the country’s commitment to balancing its books and selling a successful bond.

“I am sorry, I do not think we are prepared now, we may have  to wait and prepare adequately before we go to the international market later and not June or July”, in a telephone interview with the Graphic Business.

At the moment Ghana is paying upwards of 17 per cent in the local market for longer dated bonds of three and five years and even higher at 23 per cent for T-bills, thus crowding out the private for capital, which drives up interest rates.

But Dr Abbey wants the government t develop some clear understanding on the longer dated instrument.

“I am nervous about the fact that there is no clarity and this bond issue is going to be subjected to a partisan and highly polarised parliamentary debate, which can potentially scare away investor.

“We have to hold on issue it at a later date in order to assure the market and build our credibility, because after all it will not evaporate”, he cautioned.

But Mr Reginald France, Managing Director of Boulders Advisors Limited and a member of the National Bond Market Committee disagrees.

According to him, the appetite for Sub Saharan African international bonds has been huge and that does not appear to be waning.

“These countries are not only providing relatively higher yields but have fast improving macroeconomic fundamentals, especially growth, better institutions and stronger balance sheets”.

“The issue will be well received nonetheless and most likely tighter than the 8.5 per cent from their debut bond in 2007, which as at last week was trading at 4.87 per cent”, he added.

Analysts say, alongside the riches, Ghana’s oil boom has also ushered in a string of woes, including huge infrastructure needs and the problem of rampant public expenditure.

So, at a time when investors are displaying appetite for sub-Saharan African bonds, it’s little surprise then that the country is planning to issue a Eurobond worth up to US$1bn.

From a diplomatic point of view, the announcement may also point to a cooling off of Accra-Beijing relations.

The government had for long been courting Beijing for loans to finance its oil and gas infrastructure.

However the relationship had become a subject of criticism and the government may have been forced to seek alternative means of raising capital.

So the news of a sovereign bond issue comes as no surprise, given the government’s cash-strapped position and the need to finance much needed infrastructure projects, which the country needs to sustain its current positive growth trajectory.

So, while there is immense appetite for emerging markets debt at the moment, could Ghana’s shaky financial situation throw-off investors?

Analysts say a stumble could prove politically costly for President Mahama and financially disastrous for Ghana as it seeks to retain its access to credit to fund rapid growth.

Story: Suleiman Mustapha/Graphic Business