Bond issuances to deteriorate Ghana’s external debt rating – World Bank

Investors are worried about Ghana’s fiscal deficits, which continue to widen. Government debt is rising and the country’s debt-to-GDP ratio doesn’t look manageable – increasing to about 70 per cent, the World Bank has said in its latest economic outlook on Africa titled ‘Africa’s Pulse’.

By the time the World Bank reclassified the economic status of Ghana as middle income on July 1, 2011, Overseas Development Assistance constituted 42 per cent of the country’s budget. But after the reclassification, the country has to borrow at market rates to balance its budget exposing the country to risks.

Driving this high external debt, the outlook says is non-concessional borrowing since Ghana became a middle income country.

In the coming days, ratings agencies like Moody’s, S&P and Fitch would rate the recently issued Eurobond.

The country has so far issued four Eurobonds at market rates. The rising sovereign bond spreads and higher yields on recent bond issuances have effectively increased the country’s external debt, leading investors to raise concerns about growing external and fiscal vulnerabilities in the country and others like Zambia in sub-Sahara Africa.

In July 2015 Parliament approved a request by the government to raise an amount of $1.5 billion from the European Bond Market to manage the country’s liabilities and to support the 2015 budget.

The government indicated that $1 billion out of the facility would be utilized to finance the 2015 budget to reduce the reliance on short-term expensive domestic debts, and the other $500 million would go into re-financing domestic and external debts.

However, early October 2015 when the government issued what is its fourth Eurobond, it raised $1 billion at a coupon rate of 10.75 per cent, with a 15-year tenure.

The Ministry of Finance said the principal will be repaid in three instalments of $333 million in 2028 and 2029, and $334 million in 2030, adding that the bond was oversubscribed, exceeding the $1 billion target by 100 per cent.

But contrary to earlier information from government that the bond would ‘go into re-financing domestic and external debts’ Mr Seth Terkper, the Minister of Finance explained that the issuance of the bond “was in line with Ghana’s new debt management strategy and the proceeds would be used for the refinancing of maturing domestic debt.”

The repayments of these debts, the World Bank warns are resulting in some negative consequences for the economy.

“For Ghana, bullet repayments after 2023 for recent issuances result in a protracted breach of the baseline projection for the external debt service- to-revenue ratio, and hence the increased liquidity risks associated with sovereign bond issuances have caused Ghana’s risk rating of external debt distress to deteriorate from moderate to high risk,” it said.

The Bank notes that weak fundamentals, combined with the strong appreciation of the US dollar, have kept currencies across the sub-Sahara Africa region under pressure throughout the year.

“By end of September 2015, the Ghanaian cedi and South African rand had depreciated by more than 25 per cent against the US dollar (compared with their June 2014 levels), while the Angolan kwanza fell 38 per cent. The Ugandan shilling and Zambian kwacha weakened the most by depreciating 45 and 80 percent, respectively,” it said.

The effect of the currency weaknesses, the Bank points out have contributed to higher inflation in many countries. In Ghana for instance, consumer price inflation (CPI) remained in high double digits despite easing in recent months.

In Angola and Nigeria, CPI has continued to rise as well, exceeding the central bank’s target in both countries.

These concerns about exchange rate inflation pass-through led central banks in several countries such as Angola, Kenya, South Africa, Uganda and Ghana to hike interest rates, tightening monetary conditions.

The outlook notes that following the decision by the US Federal Reserve to leave interest rates unchanged, central banks in the region opted for a pause in the tightening cycle at their September meetings, in countries like Kenya, Nigeria, and South Africa.

However, the World Bank warns that while interest rate increases may help preserve price stability, they are likely to lower private credit growth and affect activity.

Despite the gloom, the Bank states that, among the region’s frontier market economies, rising oil production, diminishing imbalances, and easing of the electric power crisis are expected to lift growth in Ghana in 2016-2017. In Zambia, low copper prices will hold back investment in mining production and weigh on growth, limiting the rebound. Despite pressure on the shilling, Kenya is expected to continue to grow at a robust pace, supported by expenditure on large-scale infrastructure schemes, including a new railway system, which should help boost domestic trade, and a new port.

The Bank among other things notes that the widened current account and fiscal deficits have undermined the confidence in local currencies and central banks had to act to stem the pressure on these currencies.

In Ghana, the central bank raised policy rates to 25 per cent (up by 100 basis points) in September 2015.

In Uganda, the monetary authorities responded by raising the monetary policy rate by 500 basis points this year. Efforts to shore up the Kenyan shilling have led the central bank to raise rates by 300 basis points since June 2014.

The outlook however, indicates that inflation for the region as a whole seems to be relatively contained at annualized rates below five per cent.

“In recent months, the median inflation has shown a slight uptick from about three percent in January 2015 to 4.7 percent in June 2015,” it says.

Furthermore, 21 of 36 countries in sub-Sahara Africa with monthly CPI data have seen their inflation in second quarter 2015 increased relative to that of first quarter 2014.

“However, this issue seems to be more worrisome in some countries, such as Angola, Ethiopia, Ghana, Guinea, and Nigeria, where the annualized rate of CPI inflation exceeds eight percent,” it notes.

According to the Bank international bond issuance also brings significant risks, with increased foreign exchange and rollover risk being the most notable.

“Given the typical large size of international issuances (most frequently greater than $500 million), the foreign exchange exposure of the country’s debt portfolio can increase significantly, leaving the country at risk of future depreciation inflating servicing costs. This risk can be significant for the region, as evidenced by the large depreciations of the Ghanaian and Nigerian currencies in 2014,” it warns.

By Emmanuel K. Dogbevi

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