Eurobond Woes (Ghana)

Asoko Insights | 8 days ago

Investors unwillingness to offer a lower yield on government s US$1.5billion Eurobo
nd could have dire repercussions for the country s debt stock should government lo
ok to the domestic market to finance the deficit or reconsider the investors high
er yields.
According to the IMF in its last month s country report, in addition to about US$5
00million in loans disbursement for the second half of the year, the botched Eur
obond issuance is expected to complete the external financing mix of the deficit
.
Finance Minister Seth Terkper has insisted that external means of financing the
deficit such as Eurobond issuance are a key part of its debt management strategy
which among other things sought to ease pressures on the domestic debt market.
However, the latest setback on the Eurobond issuance could mean that government
either accepts a higher yield reported to be more than 11 percent
or look to bor
rowing from the domestic market to finance its capital investments.
A government delegation led by Seth Terkper, Finance Minister, and Dr. Kofi Wamp
ah, central bank Governor, was in London, San Francisco, Boston, Los Angeles and
New York to talk investors into the country s Eurobond facility.
But after the road show, government decided to put issuance of the Eurobond on h
old due to what it described as unfavourable market conditions for issuing the bon
d.
It is widely suspected that investors were asking for higher returns on the coun
try s new Eurobond, despite approval from the International Monetary Fund (IMF) an
d the partial risk guarantee (PRG) provided by the World Bank.
Currently, as it stands government has planned to issue GH2billion in net domesti
c financing for 2015 compared to GH7.3 billion (on proceeds basis) in 2014, of wh
ich GH2.3 billion was underwritten by the BoG.
Borrowing from the domestic market will not come cheap, as already government is
having to contend with high-interest payments on debts contracted locally.
Over the past 14 months, government has been borrowing short-term at a minimum i
nterest of 25 percent, contributing to a large interest burden on the total publ
ic debt stock.
As per the government s plans as spelt out in the 2015 revised budget, total inter
est payment is estimated at GH9.34billion. Of this amount, GH1.6billion will be ex
pended on external interest while GH7.7billion will be for domestic interest paym
ents.
Considering that the bond sale was also intended as a debt management strategy,
analysts argue that the failure to issue the securities could complicate plans b
y government to curb debt service costs and limit reliance on short-term borrowi
ng in order to make the public debt more manageable.
Even before government s planned Eurobond issuance hit a snag, ratings agency Fitc
h had raised grave concerns over the country s rising interest payments amidst a d
ecision to affirm Ghana s debt rating a B with negative outlook.
It noted: High domestic yields and a 60% depreciation in the currency since 2012
have pushed up borrowing costs, with interest payments now accounting for one-th
ird of government revenue
the highest level among Fitch-rated sub-Saharan Africa

n sovereigns.
High interest service costs limit fiscal flexibility and will complicate consolid
ation efforts. Financing the deficit is expected to remain challenging, particul
arly with the IMF programme restricting deficit financing by the central bank to
0% next year.
An economist, who asked not to be named, told the B&FT if the bond is confirmed
as being shelved, the amount that can t be raised will have to be borrowed domesti
cally
since the budget deficit still has to be financed.
That will put further pressure on domestic interest rates, potentially increase g
overnment interest expenditure, and intensify crowding out of the private sector
, he said.
Nana Otuo Acheampong, a financial analyst, added that without the Eurobond funds
the economic terrain becomes riskier, and the currency risks running away and c
ausing businesses to conduct affairs at a higher rate and cost than anticipated.
The funds are needed to support the budget so that the deficit can be reduced; bu
t if the deficit is going to increase, then it will affect the exchange rate of
the currency. Businesses must now learn to tighten their belts, he said.
One of government s reasons for the Eurobond sale was to lower its interest expend
iture because the Eurobond has a lower interest rate, and with currency stabilit
y the interest burden would be lowered.
But if government now has to borrow domestically at an average of 25percent, then
the interest payment out of budget will remain high or even increase marginally
. This means interest rates would not fall soon and still remain high, the econom
ist added.
The economist described suspension of the Eurobond as a significant blow to the g
overnment s fiscal plan for 2015 and 2016 , because it was envisioned to finance cer
tain capital expenditures and replace the more expensive domestic debt
but all o
f those plans now have been thrown into uncertainty.
Nana Acheampong noted that should government go back to investors, they (investo
rs) will be asking for a higher return than the one government frowned at.
He explained that with the inability of government to get the economic fundament
als right, an election beckoning and notorious over-expenditure in election year
s, and the first Eurobond due to be paid in October 2017, investors will deem Gh
ana a riskier destination and thus demand higher returns.
We are in a riskier territory. The inability to get our fundamentals rights is ki
lling us. Also, next year is an election year and since we have the penchant or
trend to overspend in election years, then investors are worried.
When you put all these together, the chances of getting a lower rate as opposed t
o what they have quoted now is extremely slim. You go back to them and they will
ask for the same rate they are asking now, or they will ask for more.