Sovereign bonds currently present African countries with relatively inexpensive new sources of external finance for infrastructure. A once rare phenomenon in sub-Saharan Africa (excluding South Africa), has become the order of the day. Sovereign bond inflows stood at USD 5 billion in 2013 – equivalent to 20% of aid to Sub Saharan Africa and 12% of Foreign Direct Investment (FDI) inflows. (ODI, 2014)
Government borrowing on international capital market has become another source of finance for fiscal budget. Developing and emerging economies are increasingly showing up on the international capital markets for additional sources of finance to support development. Ghana in 2007 issued its first Eurobond and successfully raised $750 million and in 2013 and 2014 raised $2 billion.
On 23rd July, 2015, the parliament of Ghana approved the request by the government to raise
USD1.5 billion from the European Bond Market to support the 2015 budget and refinance domestic and external debts. USD 500 million of the money raised will be used for liability management while the remaining USD 1billion will be used to support programmes and projects under the 2015 budget.
DOMESTIC FRONT
Government’s 1.5 billion cedi 3 year fixed rate bond issued on 22nd October, 2015 was under subscribed.Government raised less than the targeted 1.5 billion cedis it was looking for on the local market.It sold 995 million cedis of the three year notes with a yield of 24.5%.Investors offered 1.3 billion cedis of bids with yields between 23 and 26%.Proceeds from the bond will be used to restructure Government of Ghana debt and for maturity settlement. This has the tendencyto squeeze the real sector of the economy and foster “lazy banking”.
The auction comes days after government issued a USD 1 billion Eurobond at a coupon rate of 10.75%.Excessive borrowing will expose the economy to further risks, increase cost of doing business and contribute to the high unemployment in the country.The question is, if government which is classified as “risk free” is borrowing at 24.5%, how would you expect banks to lend to individuals and companies at a lesser rate?
Already, the International Monetary Fund (IMF) has predicted that the country’s public debt stock will hit 72% of GDP, about GH¢83billion by December 31, 2015.
TREASURY BILL RATE – 26/10/2015-30/10/2015
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BILL |
RATE |
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91 Day Bill |
25.349% |
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182 Day Bill |
26.1750% |
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1 Year Note |
24.500% |
Source: Bank of Ghana
Ghana entered an IMF Extended Credit Facility agreement in April, 2015. Under the programme and in line with the existing moratorium on new borrowing, Ghana is subject to a ceiling on new non-concessional external borrowing of $2.5 billion in 2015. Does that warrant excessive borrowing?
OBJECTIVES OF 2015 EUROBOND
1. Relieve pressure from the domestic market.
2. Smooth debt service requirement (including the use of refinancing, on-lending escrow, and sinking fund mechanisms.
3. Reduce interest payment burden on budget.
2015 EUROBOND PRICING TERMS
Issuer- Government of Ghana
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Guarantor |
International Development Association (“IDA”, a member of the World Bank Group) |
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IDA Guarantee
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Up to a maximum amount U.S.$400 per U.S.$1,000 face amount as of the Issue Date of each outstanding Note |
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Bond ratings
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|
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Total Principal Amount |
U.S.$1,000,000,000 |
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Total Guarantee Amount |
U.S.$400,000,000 rolling policy based guarantee available for scheduled coupon and/or principal payments. |
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Trade Date |
7-Oct-15 |
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|
14 October 2015 (T+5) |
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14-Oct-30 |
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Coupon |
10.75% |
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CouponPayment Dates |
14 April and 14 October, commencing on 14 April 2016 |
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10.75% |
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Redemption: |
In 3 instalmentsof USD 333.3 mn 14 Oct. 2028, USD333.3 mn 14 Oct. 2029 & USD333.4 mn 14 Oct. 2030 |
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EEA Regulated Market of the Irish Stock Exchange. In addition, after the Settlement Date application will be made for the Notes to be admitted to listing on the Ghana Stock Exchange |
The coupon rate of Ghana’s maiden Eurobond was 8.5%, 2013 Eurobond was 7.88%, 2014 Eurobond was 8.13% and the highest of all; 2015 Eurobond at a coupon rate of 10.75%. Would government borrow at such an expensive rate to settle debts?
GOVERNMENT’S PUBLIC DEBT MANAGEMENT
1. Channel to financing social infrastructure –non concessional to self- financing capital projects.
2. Shift from unfettered sovereign guarantee to project guarantees and insurance.
3. On-lending and Escrow Policy.
4. Golden Rule for liquidity management and budget financing.
5. Sinking Fund Mechanism and management of Debt.
6. Preparation of Publication of Medium Term Debt Strategy.
7. Ghana infrastructure investment fund (GIIF).
8. Municipal Bonds –initiate to finance MMDAs.
The initial idea of USD 1.5 billion 2015 Eurobond was to restructure debt and finance capital projects in the 2015 budget but because of the unfavorable market conditions, government borrowed USD 1 billion at a rate of 10.75%. To my surprise, government has indicated that, it will use the entire USD 1 billion to restructure debts. For how long will we continue to borrow to settle debts? THIS IS NOT THE WAY TO GO!!! Government must reduce the borrowing spree so that capital will be injected into the real sectors of the economy to foster economic growth.This action will defeat government’s own public debt management strategy.
In conclusion, government must strengthen the tax regime and focus on reducing expenditure so as to raise more revenue for developmental projects. Again, government must report concretely on the past three Eurobonds; what the proceeds were used for. PUBLIC DEBT MANAGEMENT MUST ANCHOR ON TRANSPARENCY!!!
Amoah-Darkwah Emmanuel
Chartered Economist
0245683297
