Projections and challenges of Ghana’s 2015 Eurobond

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GHANA AND EUROBOND
Government borrowing on international capital market has become another source of finance for fiscal budget. Developing and emerging economies are increasingly showing up on the international capital markets for additional sources of finance to support development. Ghana in 2007 issued its first Eurobond and successfully raised $750 million and in 2013 and 2014 raised $2 billion. Parliament of Ghana this year has approved a request by government to issue US$ 1.5 billion from international capital market to support the 2015 budget and refinance domestic and external debts. All these sovereign bonds despite its advantages of funding infrastructure, benchmarking and restructuring debt adds up to Ghana’s public debt. Public debt in Ghana has reached unsustainable limits; about GHC 94.5 billion.

On 23rd July, 2015, the parliament of Ghana approved the request by the government to raise $ 1.5 billion from the European Bond Market to support the 2015 budget and refinance domestic and external debts. US$500 million of the proceeds will be used for liability management while the remaining US$ 1billion will be used to support programmes and projects under the 2015 budget.

On the uniqueness of the 2015 bond, the bond would be backed by sinking fund to be funded from the portion of the excess of the Stabilization Fund earmarked for debt amortization. The amortization and Sinking Fund plan is backed by the Petroleum Revenue Management Act, and will smoothen the redemption obligations between 2023 and 2026. Again, the 2015 bond issue would be backed by the World Bank policy Based Guarantee which would enable the bond to be issued with higher rating than the current sovereign bonds thereby reducing the interest rate.

GHANA’S ECONOMIC OUTLOOK
GDP growth is expected to slow down sharply in 2015 as the government is struggling to contain inflation, the budget deficit and the debt to GDP ratio. Ghana has a GDP growth projection of 3.5%; the lowest in recent years. Inflation target for year ending is 13.5% which looks unachievable. Inflation figure for the month of August is 17.3 % whiles budget deficit target is 6.9% with cedi depreciating more than 25% since January 2015. Public debt currently stands at GHC 94.5 billion which is about 70.9 % of GDP.

EUROBOND TRANSACTIONS
Table 1
EUROBOND RATING COUPON RATE AMOUNT
2007 Eurobond S& P: B+ (Stable)
Fitch: B+ (Positive) 8.50% $750 million
2013 Eurobond Moody:B1 (Stable)
Fitch: B (Negative)
S&P: B 7.875% $1 billion
2014 Eurobond Moody:B2 (Negative)
S& P: B (Negative)
Fitch: B (Negative) 8.125% $ 1 billion

CREDIT RATING
Table 2
RATING AGENCY RATE
Standard and Poors B-
Fitch B
Moody B3
Source: Bank of Ghana

Domestic borrowing has become very expensive and mostly short-term. Currently, government Treasury Bill rate for 91-Day, 182-Day, 1 year and 2 years is 25.2%, 25.9%, 22.5% and 23% respectively.

On the success of the bond, Ghana will be successful once again but the issue has to with the coupon rate. I predict that, the coupon rate will not be below 8% based on the current macroeconomic indicators. Despite Ghana’s bailout from the IMF, IMF Debt sustainability Analysis indicates that, Ghana is at a high risk of debt distress, on account of breaches in the debt-service to ratio.

IMPACT ON ECONOMY
Sovereign bond offers an alternative source of finance for Ghana’s government and it is not subject to the conditions usually attached to bilateral and multilateral loans. With infrastructure deficit of $1.5 billion annually, critical infrastructure can be financed at cheap rates generated by relaxed monetary policies pursued by Ghana and it carries less stringent terms with reasonable periods of repayment.

For the issuance of 2015 Eurobond, it will support the 2015 budget and refinance domestic and external debts. US$500 million of the proceeds will be used for liability management while the remaining US$ 1billion will be used to support programmes and projects under the 2015 budget. This inflow will increase Ghana’s net foreign reserves and help cushion the cedi which is depreciating against the major trading currencies.

CURRENT DEVELOPMENTS
Emerging markets will suffer a net outflow of capital this year for the first time since 1980’s as their economic fortunes darken and the US Federal Reserve prepares to lift interest.

Ghana has postponed sale of up to$1.5 billion Eurobond it expected to launch last week amid a rise in borrowing costs for emerging market nations. Investors were demanding a high premium despite a World Bank guarantee for the bond of $400 million and the government appeared to be considering cutting the bond to $1 billion or lower to get the desired pricing. According to some sources, Ghana wanted to pay 9.5% yield for the bond while source involved in the book running for the launch said the market was demanding closer to 11%.

The yield on Ghana’s outstanding 7.87% Eurobond due 2023 has surged to record highs above 11.3% according to Tradeweb data. Despite how critical the Eurobond is to stabilizing foreign exchange rates and for refinancing existing Eurobond issues, it is a prudent idea for government to suspend the issue till market conditions are favorable. The suspension will have adverse effect on financing 2015 capital projects knowing that we have entered the last quarter of 2015 and debt restructuring.
AMOAH-DARKWAH EMMANUEL CHARTERED ECONOMIST KATAKYIEQUAMEVIGOR @GMAIL.COM AMOAH-DARKWAH EMMANUEL
CHARTERED ECONOMIST
KATAKYIEQUAMEVIGOR @GMAIL.COM

Projections and challenges of Ghana’s 2015 Eurobond

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