Ghana May See Debt Costs Fall After Escaping Credit Downgrade

  • Fitch affirmed credit rating while cautioning on spending
  • Partial World Bank guarantee may boost Eurobond sale

Ghana’s borrowing costs may fall in the third Eurobond sale in as many years after the West African nation escaped a credit downgrade deeper into junk and the World Bank agreed to guarantee part of the debt.

The country is embarking on a series of international investor meetings this week to market the sale of $1.5 billion of securities. A World Bank guarantee of $400 million of the debt means investors will probably demand a yield below current market rates, according to Standard Life Investments Ltd. Yields on Ghana’s $1 billion of Eurobonds due May 2023 have climbed 98 basis points this year to 10.14 percent, compared with 7.47 percent for similar-maturity debt of neighboring Nigeria.

“A partial guarantee gives investors comfort that the government will make the instrument a high-priority one to service,” Mark Baker, who helps manage about $1.5 billion in emerging-market debt including Ghanaian bonds at London-based Standard Life, said by phone on September 18. “It should be a more positive tone on the roadshow than in the past.”

Fitch Ratings affirmed Ghana’s credit rating at B, or two levels below investment grade, on Sept. 18, while retaining a negative outlook. West Africa’s second-biggest economy agreed on an almost-$1 billion program with the International Monetary Fund in April as the government struggled to tame the budget deficit while falling prices for gold and oil weighed on its currency, the cedi.

Ghana's dollar debt
Ghana's dollar debt

The IMF program is starting to produce results. Ghana posted a budget deficit of 3 percent of gross domestic product in the first seven months, less than the target of 4 percent. Inflation eased for the first time in seven months to 17.3 percent in August and the cedi gained 13 percent against the dollar this quarter after slumping 26 percent in the first six months of the year.

“Ghana’s credit story is more encouraging than what it’s been for a while,” Baker said. “There are early signals the government is reining in the fiscal deficit after so many years of disappointing performance.”

Moody’s Investors Service assigned a provisional B1 rating to the forthcoming bonds because of the partial guarantee provided by the International Development Association, the ratings company said in a statement on Tuesday. Moody’s rates Ghana B3 with a negative outlook and subsequent sales without any guarantees will provisionally be given the sovereign’s rating, it said.

Not all investors are convinced Ghana will stay the course. While the World Bank backing will help, yields on the new debt would still have to be above 10 percent to attract demand, said Arthur Alaferdov, a London-based trader in emerging market bonds including Ghanaian debt at Renaissance Capital Ltd.

“Ghana hasn’t fully completed any single IMF program,” Alaferdov said by phone on Sept. 18. “You might find some optimistic people, you might find someone who is less optimistic, but in all you’ve got some weak credit.”

Election Looming

Fitch said growth in West Africa’s second-biggest economy would slow to 3 percent this year, from 4.2 percent in 2014, and cautioned that overspending before an election next year may derail attempts to rein in the budget deficit. The IMF program and progress on the fiscal front were credit-positive, the company said.

Yields on Ghana’s $1 billion of Eurobonds due Aug. 2023 climbed 17 basis points to 10.21 percent by 4:52 p.m. on Tuesday in London. The cedi gained 1.5 percent to 3.8727 per dollar.

While investors remain cautious about Ghana’s fiscal prospects, the partial guarantee will hold yields in the Eurobond sale below 10 percent, said Claudia Calich, a fund manager who helps oversee $1 billion of emerging-market assets at M&G Ltd.

“A partial guarantee improves the credit structure,” Calich said by phone from London on Sept. 15. “The recent fiscal numbers appear to be going in the right direction but this needs to be part of a multi year effort.”

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