Ghana Raises US$3Bn via Discounted Foreign Currency Bond
Nana Akufo-Addo, Ghana President

Ghana Raises US$3Bn via Discounted Foreign Currency Bond

The government of Ghana has raised US$3 billion via the discounted foreign currency denominated bond class using a 4-year zero-coupon bond tranche, the finance minister revealed.

According to Finance Minister Ken Ofori-Atta, the issuance was two times oversubscribed at the international debt market. For fiscal year 2021, the authorities plan to raise up to US$5 billion on international capital markets.

Fitch Ratings had in March 24 assigned Ghana’s (B/Stable) proposed senior unsecured foreign currency bonds a ‘B’ rating. The agency said the rating is in line with Ghana’s long-term foreign-currency issuer default rating (IDR).

“This historic bond issuance is a strong signal that investors have confidence in our plan for debt sustainability, economic recovery and growth,” Finance Minister Ken Ofori-Atta was quoted as saying.

The ministry said using US$400 million of the money raised to refinance domestic debt would enable the country to save around US$200 million over the four years.

As a result of its zero-coupon, the bond does not make periodic interest payments, but is sold at a discount to its value at maturity while analysts said Ghana raises the fund to reduce impacts of covid-19 on the economy.

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Long Fiscal Consolidation Plan Has Slippage Risk

In report, Fitch Ratings said the slow pace of the consolidation path outlined by Ghana’s 2021 budget statement and by the accompanying medium-term fiscal framework leaves Ghana exposed to a heavy debt-service burden and risks of fiscal slippage.

According to Fitch, this path is supported by new revenue measures and the gradual implementation of expenditure cuts.

“We indicated that our assessment of the medium-term trajectory of public debt would be an important rating sensitivity when we affirmed Ghana’s Long-Term Foreign-Currency Issuer Default Rating at ‘B’ with a stable outlook in October 2020”, it said.

It was noted that Ghana’s budget aims to reduce the fiscal deficit from 13.8% of GDP in 2020, including off-budget energy and financial-sector restructuring costs, to 10.8% of GDP in 2021, 7.5% in 2022 and below 5% by 2024.

The Ghanaian government reports that debt hit 76.1% of GDP at end-2020, about 4 percentage points higher than Fitch had previously forecast.

“There is a significant risk that public finances could fall short of the goals outlined in the budget, particularly given the government’s lack of a clear majority in parliament.

The gradual pace of projected consolidation will mean Ghana’s ability to absorb any new shocks will remain weak for an extended period. Any such shocks would increase the likelihood of government debt remaining on an upward trajectory beyond 2022”, the Ratings said.

It noted that high cost of the government’s debt burden is an important rating weakness and will continue to squeeze the government’s other spending priorities.

However, according to the government, interest costs were equivalent to 6.4% of GDP in 2020, or 45% of total fiscal revenue.

“The large increase in debt in 2020 means that interest costs will increase in 2021 – we forecast interest spending to breach 50% of government revenue in 2021, well above the median of around 11% for ‘B’ rated sovereigns”, Fitch explained.

The agency expects Ghana’s interest expense to fall as a share of revenues and GDP from 2022, although it will remain above the ‘B’ median for many years to come.

“We estimate that the weighted-average interest rate on domestic debt fell to 17% in 2020 from over 20% in 2016.

“Ghana has one of the highest real policy rates among emerging-market sovereigns, which indicates that interest rates may have further room to fall, so long as the government can maintain its policy credibility and the global environment supports a falling rate of inflation”.

It said the new international debt issuance may also reduce the government’s calls on domestic debt markets, as well as ease external funding pressures and support overall macroeconomic stability. The authorities has indicated plan to raise up to US$5 billion on international capital markets in 2021.

Fitch also sees risks to the budget’s revenue forecasts. The government plans to increase fiscal revenues, aided by 1 percentage point increases in value added tax (VAT) and the National Health Insurance Levy.

“However, achieving total revenue of an average of 16.8% of GDP over 2021–2024 may be difficult. Government revenue averaged 15.4% of GDP over 2016–2019”, Fitch said.

Nonetheless, the agency said there are factors that could provide some headroom for the public finances. Projected public capital expenditure, at 4.1% of GDP in 2021, is high compared with the 2% average in 2018–2019, and may fall short of target.

It added that the government’s 5% forecast for average annual economic growth in 2021–2024 also appears conservative, given Ghana’s pre-pandemic performance and the low base of comparison in 2020, which may point to some upside potential for revenue.

Ghana Raises US$3Bn via Discounted Foreign Currency Bond