New foreign-currency issuances and a debt management strategy in Ghana

A macroeconomic overhaul is currently under way in Ghana, including in its borrowing practices. A shift is being made to reduce bond issuance in the domestic market, to extend the overall maturity of its existing debt profile and to lower the debt-toGDP ratio, which stood at 65.3% at the end of the first quarter of 2015, according to statistics from the central bank, the Bank of Ghana (BoG).

The statistic tells the story of how the country’s approach to debt has changed. It had hoped to leverage its access to capital to spend on infrastructure, and in the 2000s had expected oil production and the rebasing of GDP to provide greater access to global capital markets. However, with fluctuating commodity prices and a stubbornly high wage bill, Ghana has spent more than it planned to on operational expenses rather than on new infrastructure.

A New Plan

For the long term, however, a new comprehensive debt-management strategy is in the works and was set to be approved at the Cabinet level by end of 2015, according to the IMF. If programme implementation proceeds as expected, public debt is expected to decline from roughly 72% of GDP at year-end 2015 to 58% by 2019, according to the IMF. The long-term target is to maintain it at around 40%. One of the first steps in debt management will be to issue another eurobond, the fourth since 2007. Even with rising rates and long-term risk, the eurobonds cost Ghana far less than what it would pay in the domestic market – interest rates are less than 10% internationally, but more than 20% when borrowing at home in cedi. Using dollar-denominated debt to retire more expensive domestic debt means lowering debt servicing costs now and extending payback periods in the process, as domestic sales are mainly for three years or less. Eurobonds, on the other hand, are generally 10 years in maturity, with repayment typically due at the end of the period, in a single bullet payment, or in several instalments.

A shift away from issuing bonds in cedi may also help domestic borrowers, as a reduction in government supply could stimulate further demand for private sector issuers. It is hoped that 2015 will see a drop in total domestic debt, which stood at GHS5.97bn ($1.7bn) at the end of 2014, according to figures from the BoG. Eurobonds change the nature of debt sustainability in Ghana because they lower immediate costs, but do come with long-term concerns due to the bullet-payment structure. Back loading repayment to the end of the period means that when it is time to pay back that debt, Ghana may need to sell another eurobond to fund repayment of the maturing one.

Back-Loaded Risk

As long as global economic conditions are favourable, this is a reasonable plan. But if Ghana needs to do this at a time when global capital markets are in bad shape or if there is a financial crisis, it may not be able to. With the current domestic debt policy goal of the government being to limit BoG sales to liquidity management purposes, the idea is to use short-term securities aimed at helping banks to manage their balance sheets. The only regular sales as of May 2015 were for 14-day bonds. The central bank has scrapped one-, two- and nine-month notes.

The state has been selling three-year bonds, however, and intends to help push out maturities, albeit for a shorter period and at a higher cost than eurobonds. A three-year bond sale was abandoned in October 2014 on account of low investor interest, but several sales have occurred in 2015. In February GHS630m ($174.8m) was offered and GHS470.08m ($130.4m) was sold at a rate of 23.23%. In April the BoG offered GHS400m ($111m) in three-year bonds, and ended up selling GHS103.37m ($28.7m). The interest rate was at 22.49%. The May auction aimed to raise GHS630m ($174.8m) and attracted a total of GHS502.1m ($139.3m) at a rate of 23.47%.