Ghana faces further hikes in cost of public debt

Despite ongoing efforts to lower its public debt servicing costs through the lowering of yields on the debt securities if offers, government is having to face up to rising interest costs on its debt.

The most recent five year debt issue, which the Ministry of Finance announced last week carried a coupon interest rate of 24.75%.

[contextly_sidebar id=”Dt55Ie4yfhsjaANrRed0qga6zk5fb0gK”]Although this is within the initial price guidance range of between 23.50% and 25.75% given to investors, it is actually in the higher half of that range, contrary to the Finance Ministry’s claim that it is closer to the lower end.

More instructively, it is higher than the 24.00% coupon rate arrived at during the most recent previous five year domestic bond issue, done in November last year, which heralded the replacement of the public auction system with the book running system, for government’s medium term debt issues.

The book running system allows the opportunity to negotiate the coupon rate for each issue with investors, using their engagement to persuade investors to accept as low a rate as possible by lowering the investors perception of the credit risk associated with each issue.

Indeed market analysts believe that if a public auction had been used to issue the latest five year bond, the coupon rate would have  exceeded 25%.

The three book runners appointed by government are Barclays Bank, Stanbic Bank and Strategic African Securities.

Even more instructively, the three year bonds issued in early 2013, which part of the proceeds of the latest five year bonds are being used to amortize, were issued at a coupon rate of just 16.73%. Therefore, although the latest five year bond issue has successfully extended the public debt tenor and given government breathing space with regards to principal repayments, it has significantly increased the cost of the debt financing.

Indeed, the short term debt that is also being refinanced from the new five year bond issue carried coupon rates that were marginally lower than that on the issue being used to refinance them.

However, the new issue is justified in this regard by the extension of the tenor of the short term debt being refinanced.

All things considered, including roll over costs incurred in continuously having to issue new short term treasury bills and notes each time the old ones mature, as well as the sheer time and effort involved, a five year issue is a better option.

Since the medium term securities are listed on the Ghana Stock Exchange, government has the option of buying back the newly issued debt if it gets the opportunity to issue new debt at significantly lower rates during the five year tenor of the latest issue.

The current situation is persuading the Ministry of Finance to accelerate its time table for doing another US$1 billion Eurobond issue this year.

Actually, Finance Minister Seth Terkper has already stated that this year’s Eurobond issue will come earlier in the year than previous ones because government does not want to do the issue so close to the November elections that it would become a major political issue.

Latest developments however point to its being brought forward even further.

The United States Federal Reserve Bank has decided to only do two interest rate hikes of 250 basis points each, rather than four originally planned.

This has allowed it not to increase rates at its first opportunity this year and Ghana’s government will be seeking to take advantage by issuing its 2016 Eurobond before the first of those hikes and by so doing getting a better rate than otherwise.

However, market analysts predict that Ghana may actually have to pay an even higher rate this year than it did last year as market conditions continue to worsen for African Eurobond issuers.

Which would add further to the rising cost of servicing Ghana’s  public debt.

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By:  Toma Imirhe/citibusinessnews.com/Ghana