Debt restructuring reduces near-term repayment obligations in Ghana

In 2007 Ghana became the first West African nation to issue a eurobond. Demand for the $750m issuance – a 10-year bond with a yield of 8.5% – exceeded supply by a factor of four, prompting other African nations to follow suit. This means that in 2018 nearly $25bn worth of sovereign debt in the region is set to mature. Since its first foray into the market, Ghana has issued four more $750m eurobonds, generally at higher rates, and has regularly issued cedi-denominated bonds as well.

However, as accumulated debt has grown, interest payments have come to account for a greater portion of government outlays, leading to debt restructuring programmes to reduce near-term payment obligations.

Scale

Between 2012 and 2016 total public debt more than tripled from GHS36bn ($8.6bn) to GHS122.3bn ($29.3bn). As a share of GDP it rose from 47.8% to 72.5% over the period. In 2016 Ghana spent around 20%, or GHS10.8bn ($2.6bn), of total government expenditure on servicing its debt interest payments. Bank of Ghana estimates saw this figure increasing to GHS13.3bn ($3.2bn), accounting for around one-quarter of total spending. This was projected to continue increasing to GHS14.9bn ($3.6bn) in 2018. In response, the IMF expressed concerns in its August 2017 Article VI report, describing Ghana’s debt-to-GDP ratio as “elevated”, placing it at a risk of external debt distress.

Strategy

In April and May of 2015 the IMF provided technical assistance to the Ghanaian Treasury to develop a medium-term debt strategy with the goal of reducing the volume of high-interest debt and extending the average maturity of domestic debt – which, given the banking sector’s propensity for Treasury bills (T-bills), accounted for 80% of the total as of 2016.

This policy has appeared successful, although 91-day T-bills were still the most traded item by the first quarter of 2017, with GHS10.4bn ($2.5bn) traded against a target of GHS8.6bn ($2.1bn). By November 2017 rates for 91-day bills had fallen to around 13%, compared to a high of more than 23% in previous years. The government has also successfully sold longer-term paper, with 2017 seeing the first trading of 15-year bills.

Restructure

With the country’s original eurobond maturing in 2017, Ghana has partially financed repayment through the issuance of new bonds. In 2013 one-third of revenues from the country’s second $750m eurobond were used to finance repayment, albeit at a lower coupon rate. The following years saw repayment revolve around refinancing the 2007 bond with a $1bn, 15-year issuance and a $750m eurobond issued in 2016, which set aside $200m to retire the 2007 bond.

Big Issues

In 2017 the government embarked on two major bond issuances. In April four separate cedi-denominated bonds raised the equivalent of $2.25bn, with the total value split evenly between five- and 10-year bonds with 18.75% and 19% coupons, respectively, and seven- and 15-year bonds with a yield of 19.75%. The revenues, destined for the Treasury’s reserves, went some way towards slowing depreciation and stabilising the value of the cedi over the course of 2017.

In October 2017 the government issued a non-sovereign bond designed to retire legacy debt from the country’s energy sector, which weathered a difficult year in 2015. Arranged by Fidelity Bank and Standard Chartered Ghana, the bond aimed to attract GHS6bn ($1.4bn), with a coupon of 19% to be paid directly from future energy sector levies. However, the issuance failed to entice investors. Even after extending the deadline by a week with a revised target of GHS3.6bn ($861.8m) at 19.5%, the bond raised GHS2.3bn ($555.6m).

Ghana was not the only African country to turn to the eurobond market in the wake of the global financial crisis of 2008, and it is not alone in its policy of issuing new debt to service old. A number of countries have risked growing their debt-to-GDP ratio while commodity prices remain low; however, thanks in part to oversight provided by the IMF as part of the credit facility signed in 2015, Ghana looks well placed to manage its debt structuring process in the short to medium term.