Ghana’s Ministry of Finance has officially denied that it is doing a road show in order to issue new Eurobonds imminently.
An official statement from the Ministry at the beginning of the week claimed that the ongoing road show, which is taking its officials and representatives of the Bank of Ghana to the United States and the United Kingdom, is a non deal one which simply aims to update the international capital markets on the latest developments in the Ghanaian economy and the consequent impact on the country’s economic performance and potentials going forward.
[contextly_sidebar id=”j5tSkJDCShDdCrvTetyIQZGEPjsIAImA”]However, considering that Finance Minister Seth Terkper had revealed in January that this year’s scheduled Eurobond issue would be done relatively early in the year compared with previous ones, which all took place during either the third or fourth quarters of the year, this means that government is testing the waters ahead of an actual effort to sell an impending bond issue to international investors.
Ghana’s economic managers will not like their findings, although they will be expecting unfavourable terms right from the start.
The latest Eurobonds issued by government late last year, worth US$1 billion, incurred an interest yield of 10.75%, well above the single digit interest rate it had hoped for and indeed this was a record high yield for an African sovereign issue on the Eurobond market.
Those bonds, by the end of last week, were trading on the international secondary capital market at a yield of about 12%.
This gives an indication of the yields that will be demanded by investors when Ghana issues its 2016 tranche of Eurobonds.
Instructively, at the time Ghana issued its 2015 bonds, the ones issued in 2014 at 8.725% were trading at about 10.4% and Seth Terkper’s assurances at the time that this would not be reflected in commensurately high investors’ yield demands proved unfounded.
Even the best efforts of Ministry of Finance and Bank of Ghana officials and those of the financial institutions acting as its book runners will therefore be unlikely to keep the rate demanded by investors on this year’s Eurobond issue below 11.5%.
The rising yields being demanded by investors on Ghana’s Eurobond issues are the inevitable result of a combination of the country’s precarious public and external finances, and a general tightening of conditions for African sovereign bond issuers on international capital markets.
Although Ghana achieved considerable fiscal consolidation in 2015, there are widespread doubts whether the pace of consolidation can be maintained this year with general elections looming.
Fitch Ratings last week forecast that the fiscal deficit for 2016 will be about 6.3%, which is significantly higher than the ambitious 5.3% agreed by government and the International Monetary Fund.
Moody’s forecasts are even more pessimistic, predicting a 7.5% deficit this year.
Ghana’s external position is precarious as well and only the central bank’s tight monetary policy and recent heavy foreign financing have prevented renewed steep cedi depreciation and the country is paying a price for the former in terms of constrained economic growth.
In 2015 Ghana incurred a merchandise trade deficit of US$2,006.1 million and a current account deficit of US$2,808.2 million, and it was only hefty capital account inflows in the form of foreign loans and grants during the latter part of the year that enabled the country to keep its overall balance of payments deficit to a manageable US$105.8 million.
On the upside though, is the expected commencement of revenues from oil sales from the TEN Cluster oilfield later this year.
Equally worrying for foreign investors is the sheer quantum of Ghana’s foreign debt, which rose from US$23.7 billion, equivalent to 66.5% of Gross Domestic Product, as at March 2015 to US$25.6 billion, or 72.9% of GDP by the end of the year.
Importantly, the share of external debt which has direct foreign currency exposure risks rose from 38.7% of GDP to 43.4% of GDP during those nine months.
While the share of domestic debt declined from 27.8% of GDP to 25.2% of GDP, about a third of this cedi denominated debt is actually held by foreign investors who can discount their investments and demand to convert their monies back to US dollars whenever they choose, such as during renewed cedi depreciation which would threaten them with currency exchange losses.
Ghana also faces the problem of tightening general Eurobond market conditions for African issuers. Virtually every African issuer , including even the continent’s biggest economies of Nigeria and South Africa have seen their most recent issues downgraded on the secondary market with yields now significantly higher than what they were when initially issued.
This is the result of both depressed global market prices for the primary commodities that African countries tend to rely on for their foreign earnings, and the end of quantitative easing by the United States central bank, the Federal Reserve Bank, which last year began gradually raising interest rates thereby raising US dollar denominated investment yields.
Indeed since late last year a couple of African Eurobond issuers have cancelled the issues they had planned, scared away by the rising yields being demanded by investors.
Ghana however does not have that luxury.
Faced with a plethora of maturing high yield domestic securities and even more importantly the maturity of the outstanding US$531 million next year on the country’s first Eurobond issue, debt refinancing needs make another Eurobond issue imperative.
Much more so with the need to finance development projects ahead of the November polls to win the support of voters.
Ghana will be asked to pay an even higher rate this year for its next Eurobond issue than it is paying on last year’s issue but it has little choice but to take the offers as they come.
By: Toma Imirhe/citibusinessnews.com/Ghana