Investors yet to be convinced - market analysts offer reasons

Investors' demand for a higher-than expected country risk premium on the country’s attempted Eurobond issue emphasises the fact that recent gains in fiscal efficiency and macroeconomic stability remains too fragile to command a lower premium,analysts have said.

“Although the currency stability has been sustained since the fourth quarter of 2015 and the budget deficit appears to be on the decline, the uncertainty about the fiscal implications of the upcoming elections and the worrying debt dynamics are major concerns to investors,” a senior economist with Databank said in an interview.

“The timing of the new issue was a bit puzzling, coming to issue a bond just before some of the pending issues with the IMF were being ironed out. That’s what kept many investors away,” he added.

But this rejection of the Eurobond price offer comes despite the perceived stability in the Debt-to-GDP ratio to 63 per cent, which raises major concerns about the country’s debt dynamics, which has a higher concentration of the debt component being external of almost 60 per cent. This, Mr Courage Martey said highlights the vulnerability of Ghana's debt position to exchange rate shocks. 

Ghana’s attempt to reconnect with the global financial system to sell an Eurobond suffered a drawback as thirsty investors balked off the single digit coupon the price demanded by the government.

 The government insists on a single digit coupon while hungry investors wrestle for a double digit price amid concerns of a fragile macroeconomic stability.

 While the government says it will monitor the markets and revive the sale at the optimal time when conditions are right, analysts say, fears of a relax commitment to fiscal targets ahead of the Presidential and Parliamentary elections in December may cause a rejection of the country’s bond offer.

Lower premium

“Accumulating more external debt in the face of external and domestic risks to foreign exchange stability only raises the country's risk profile, leading investors to demand higher risk premium,” he said.

The decision to issue another Eurobond to refinance an earlier one also indicates inefficiency in the use of proceeds from debt securities as the return on projects financed do not compensate for the cost of the debts contracted, showing the country as a risky borrower.

“In any case, given that the outstanding 2017 Eurobond was contracted at 8.5 per cent and prevailing market conditions reflecting yields in the region of 10 per cent or more, refinancing the 2017 Eurobond  at the prevailing yields would undermine government's Debt Management Strategy of replacing expensive debts with cheaper ones,” he argued.

Debt buyback

He said the government would have to remain committed to fiscal discipline with the aim of accumulating fiscal buffer in addition to the sinking fund to continue its debt buy-back programme for the 2017 Eurobond, which matures in October 2017.

This is also in the hope that the post-election fiscal and macroeconomic indicators remain consistent with the IMF expectations in order to bolster investor confidence for a slightly lower risk rating by investors.  

The government has also capped a buyback tender for US$500 million of 2017 notes at US$100 million. This meant that the government will buy up to US$100 million of notes in tender.

 But even that, the Institute for Fiscal Studies has also raised worrying concerns with the planned amortisation of the buyback of the 2007 Eurobond.

 The worry, according to the policy think tank, is that the government will have to resort to higher domestic borrowing as a consequence of buying back the 2007 Eurobond. 

This the institute states has higher implications for the domestic interest rates, inflation and real GDP growth rates.

 IMF help

The country turned to the IMF for assistance last year as a plunge in the cedi and dwindling oil revenues weighed on the economy.

For now, the country is faced with limited fiscal space with high debt burden, low debt sustainability, large gross-borrowing requirements and rollover risk due to tight domestic and external funding conditions.

Moody’s Investors Service has rated the country’s debt B3, below investment grade, with negative outlook.

Moody’s forecasts Ghana’s budget shortfall to be 6.1 per cent of GDP this year compared with the government’s target of five per cent. It sees debt to GDP increasing to 70.2 per cent by the end of the year from 63 per cent currently. — GB