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Ghana: rising debt and new Eurobond make uneasy partners

A prudent borrowing strategy will be needed to ensure that financing needs are met at the lowest possible cost
A prudent borrowing strategy will be needed to ensure that financing needs are met at the lowest possible cost

The government of Ghana recently confirmed its decision to issue a new $1bn Eurobond in June to help repay part of the outstanding 2017 Eurobond. The timing is partly good as it follows on from the early-April approval by the IMF of a $918 million, three-year Extended Credit Facility (ECF).

At the same time, the government also said that it will drop an earlier plan to borrow up to $1bn from the Bank of America (BoA), which analysts believe is due to the higher cost related to this bridge financing. Meanwhile, the government also cancelled its plan to issue a $104 million equivalent, 7-year domestic bond that was intended to help restructure existing local currency debt and address some arrears to government contractors. The debt stock is expected to rise to around 71 percent of GDP this year –double the level in 2009.

The IMF’s loan is the catalyst in helping alleviate the government’s immediate financing squeeze. While only 13 percent of the ECF will be disbursed (compared to 78 percent in a recent loan agreement with Kenya), it helps provide comfort to potential Eurobond investors that economic and structural reforms will be forthcoming, which in turn will help re-establish macroeconomic stability.

The BoA loan appears a fall-back option that is now no longer required – assuming the Eurobond costs in aggregate will be lower. Analysts agree with the government’s decision to cancel the local currency bond but questions the wisdom in issuing a new Eurobond. ‘The decision to cancel the 7-year local currency bond is sensible given the likely coupon the government would have probably faced would have been around 21-23 percent. The government could start to re-issue in one or two months at less than 20 percent if reforms are making early progress,’ analysts at Ecobank said in a research note last week.

‘However, it is not clear that issuing a new Eurobond is sensible from a longer term perspective: the IMF has advised that “a prudent borrowing strategy will be needed to ensure that financing needs are met at the lowest possible cost”. This statement reflects IMF concern over the issuance of a new Eurobond given Ghana’s rising debt stock, foreign exchange risk, and current high borrowing costs in a context of falling oil prices, cedi depreciation, and fiscal difficulties. Concessional borrowing is the IMF’s preferred option,’ they said.

The analysts added that the IMF’s concern is all the more relevant as Ghana sold a $1bn, 10-year Eurobond in September 2014 at a coupon of 8.125 percent, lower than analysts had expected given the fiscal difficulties facing the country but at higher rate compared to other African sovereigns. ‘Nevertheless, the bond was oversubscribed with orders of up to $3bn, reflecting the appetite for relatively risky sovereign Frontier Market debt given lower yields in developed markets. The main challenge now facing the authorities is to implement tough reforms that will create an environment of austerity. If early progress is made, this will bolster investor confidence paving the way for a re-balancing of the economy,’ the analysts said.

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