Ghana Pitches Eurobond to Investors Just as Costs Start to Rise

  • Debt sale looks ‘prohibitively expensive,’ RMB analysts say
  • State spending rising before presidential, parliamentary vote

Ghana’s latest plan to sell Eurobonds is starting to unravel.

As the West African nation markets its fifth sale of dollar securities in nine years, its bonds are faltering as investors fret about the government’s commitment to fiscal targets in an election year.

Ghana’s $1 billion of bonds due 2023 have tumbled, pushing yields up by 75 basis points since July 22 to 10.4 percent on Tuesday, compared with a 48 basis-point drop to 6.8 percent in average yields of 17 sub-Saharan African nations. Officials may seek to raise as much as $1 billion in a Eurobond sale this week or next, said Nicolas Jaquier, an emerging-markets economist at Standard Life Investments Ltd., who attended an investor meeting in London.

President John Dramani Mahama’s government is battling to meet growth forecasts as lower oil-export earnings and regular power cuts weigh on the economy ahead of December elections. Finance Minister Seth Terkper said on July 26 that state spending will be 3.8 percent higher than projected and that the budget deficit target had been missed. Investors are wary, according to analysts at Rand Merchant Bank Ltd.

“The cost of floating the bond looks prohibitively expensive,” Celeste Fauconnier, Nema Ramkhelawan-Bhana and Neville Mandimika, analysts at Johannesburg-based RMB, said in a note Tuesday. “The risk of debt distress remains high.”

The yield on the nation’s $1 billion of securities maturing in 2023 rose two basis points to 10.43 percent at 2:21 p.m. in Accra on Wednesday. Ghana’s average sovereign yields are the highest among peers in sub-Saharan Africa after Mozambique and Zambia.

IMF Support

The world’s second-largest cocoa producer turned to the International Monetary Fund in April last year for a loan of almost $1 billion to help rein in the deficit and arrest declines in the currency. The country will need to offer a yield higher than its existing debt to win the backing of investors concerned that the 2016 budget-deficit target of 5 percent of gross domestic product may be sacrificed as the government prepares for the vote, Standard Life’s Jaquier said.

“In the past, in every election cycle, there’s a big fiscal slippage,” Jaquier said by phone from London.

Lawmakers voted on Monday to amend Bank of Ghana laws, lowering a cap on how much the central bank can lend to government to 5 percent of previous year’s revenue from 10 percent, according to minutes of a parliamentary meeting handed to reporters in Accra. The move effectively rejects an IMF suggestion that the central bank should make no advances for government’s spending plans.

Surging Yields

Yields on Ghana’s bonds surged the most in four months on July 26 after Terkper said the nation would increase spending even as lower income from oil widens the budget deficit. The shortfall for the first five months was seen at 2.5 percent of gross domestic product, compared to a target of 2.2 percent. He cut the growth forecast to as low as 4.1 percent from an initial estimate of 5.4 percent.

Ghana will sell $500 million to $750 million in Eurobonds, but will raise as much as $1 billion “if rates are favorable,” Terkper said by phone from New York on Tuesday. “We are confident of favorable yields on the low deficit, low debt-to-GDP ratio and the prospects for positive growth,” he said.

Proceeds will be used to refinance dollar debt maturing next year and to boost foreign reserves, Terkper has said. The country hired Bank of America, Citigroup Inc., and Standard Chartered Plc to arrange meetings with investors in London, New York and Boston, a person familiar with the matter said last week.

“We do not believe the faith in the market is strong enough” to prevent an expensive transaction, the RMB analysts said.

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