Ghana’s fiscal challenges continue to impact negatively on its creditworthiness as investors shun debt instruments sold by government in its bid to raise funds to retire maturing debts.
In the past five months of this year, two out of the four domestic bonds issued by the Bank of Ghana (BoG) were under-subscribed by 15 per cent and 32 percent in January and in May. The funds were raised at an interest cost of 24.75 per cent and 24.95 per cent respectively.
The other two bonds issued in March and April were over-subscribed but at high yields.
With the May bond issue, Ghana managed to raise only GH¢341 million out of a targeted GH¢500 million.
Another three-year GH¢500 million bond issued in January was only able to raise GH¢426.23 million.
That auction which was open to both foreign and local investors saw international bids totaling only GH¢20 million.
Out of the GH¢426.23 million bids realised, the BoG took GH¢373 million at an interest of 24.75 percent, sparking concerns amongst analysts who contended that the rate was too high compared to a 23.85 percent earned on a similar bond issued last year.
Analysts maintain that the development is a pointer to the dwindling investor confidence in the Ghanaian economy. They have cautioned that the situation could worsen as the economy remains troubled underpinned by a high debt overhang.
Head of Banking and Finance at the University of Ghana Business School, Professor Godfred Bokpin believes the under-subscription of the bonds show dwindling confidence in the country’s economy, primarily because of the debt situation.
According to him, “government has maintained an increasing borrowing culture over the past four years, and as your borrowing increases, more and more investors become skeptical about the future; this is why the interest rates of these investors will increase, and their willingness to lend will decrease as well.”
Research fellow with the Institute for Fiscal Studies (IFS), Mr Leslie Mensah blamed the development on the country’s rising debt levels, warning that the future looked bleak for subsequent bonds.
"The government's cost of borrowing is still uncomfortably high, and this is due to high inflation, a high policy rate, and a high rate of refinancing plus new borrowing. This is driving up domestic debt service costs and contributing to the pressure on government finances. Unless inflation is reined in and unless further progress is made on cutting the budget deficit, which would also help to stabilise or improve debt ratios, borrowing costs will remain high for a while," he explained.
Mr Mensah added that the medium adopted by the BoG for the sale of the bonds was also a major factor.
According to him, the two three-year bonds which performed poorly were issued through a syndicate of banks (the auction process) while the successful ones were sold through the book-building approach which involves face-to-face engagement between investors and Ghanaian officials.
Already, there are concerns Ghana could pay a higher interest on its fifth Eurobond as earlier intentions to sell were abandoned due to unfavourable market conditions.
Early this year, the Finance Minister led a team of government officials to meet with investors to showcase the country’s growing economic prospects in a non – deal road show. The move was to pave the way to issue another Eurobond to raise capital from the international money market.
Even though it is not clear when government will issue the Eurobond, experts including the head of the IMF mission to Ghana Mr Joel Toujas-Bernaté have warned that issuing the bond will be influenced by market conditions.
“The concern about debt dynamic season is driven by the fiscal position. At the start of the year, they can use a large part of these cash balances if indeed the market conditions are not right for issuing a new Eurobond,” he said
Last year, government, desperate for funds, succumbed to the highest interest rate the country has ever gotten in a Eurobond Issue, in order to raise $1 billion on the international money market.
It originally sought to raise $1.5 billion to retire maturing debts but was compelled by unfavourable market conditions to take less ($1billion) at 10.75 per cent interest.
Economists were critical of the deal, describing the interest cost as disappointing, especially when the Word Bank had provided a guarantee to the tune of $400million and Ghana’s peers in the sub region had sold Eurobonds at lower yields.
Kenya which issued a GH$1billion bond at the same time as Ghana got a yield of 6.85 per cent while Ivory Coast earned a rate of 6.625 per cent also for $1billion.
“The fact that government intended to raise $1.5 billion on the international market but was able to raise only $1 billion is a sign that confidence in the economy is waning,” Financial Analyst, Mr Kenneth Thompson noted.
<<Print>>