Yield Exceeding 10% May Lure Investors to Ghana’s Eurobond Saleby and
West African nation plans to raise as much as $1 billion
Will have to convince investors it has finances under control
With yields among the highest in Africa, Ghana may find plenty of takers searching for a premium in a coming round of Eurobond sales.
The world’s second-largest cocoa grower plans to raise as much as $1 billion after the International Monetary Fund endorsed its efforts to consolidate debt and stabilize a volatile currency. A successful sale hinges on government officials persuading potential buyers that double-digit returns are adequate compensation for concerns over shrinking oil revenue and years of overspending at a time when Mozambique’s debt crisis is making some investors wary of African issuance.
“We think it’s a good story,” said Stephen Bailey-Smith, a strategist at Denmark’s Global Evolution Fonds A/S, which holds Ghanaian dollar and local-currency debt among $3 billion of frontier-market assets. “We would probably have appetite if they issued at a yield above 10 percent. Enough people in the market would think it offers good value.”
While yields on Ghana’s $1 billion of Eurobonds due August 2023 have dropped 4.59 percentage points from a record high in January, at 11.33 percent they’re still the highest among 18 sub-Saharan African nations after Mozambique and Zambia, and more than twice the average of sovereign debt, Bloomberg indexes show. Russia, Poland and Romania have tapped international markets in recent weeks to take advantage of low borrowing costs in Europe, while Hungary and Saudi Arabia are considering sales.
Ghana, which heads into presidential and parliamentary elections as early as November, will use proceeds of a new Eurobond to help plug its 2016 budget deficit, which the IMF said last month could reach 4.8 percent of gross domestic product, lower than the government forecast of 5.3 percent of GDP. The rest will be used to refinance dollar bonds maturing in October 2017, with a balance of $531 million outstanding, the government said. The deficit topped 10 percent of GDP for a third year in 2014 before shrinking to 6.7 percent in 2015.
“You will need to see more progress on stabilizing debt and the fiscal deficit before they drop closer to the average,” Mark Bohlund, an analyst at Bloomberg Intelligence, said in an e-mailed response to questions. “Authorities need to stay on the current fiscal course past the elections for a more significant re-evaluation.”
Ghana turned to the IMF in April last year for a loan of almost $1 billion to help rein in the deficit and arrest declines in the currency as lower prices for its gold, cocoa and oil exports and 24-hour power cuts weighed on the economy. Growth slowed to a two-decade low of 3.9 percent last year as the central bank increased its benchmark interest rate to 26 percent to suppress inflation. Government debt reached 100 billion cedis, or 71.4 percent of GDP, in December.
Some investors, already spooked by an approaching default in Mozambique, aren’t convinced that the government has done enough. The southern African country, with owes foreign creditors $11.6 billion in foreign debt, is struggling to repay its debt as it faces a cash crunch following the collapse in commodity prices. While Ghana’s debt burden isn’t as high, it also has to cope with the slump in commodity prices and a weakening currency.
“They ratcheted up government spending and the fiscal deficits so much that they’ve not been able to fix it,” Jan Dehn, head of research at Ashmore Group Plc, which manages $51 billion of emerging market assets, said by phone from London. “To think they can come to the market now is to seriously misunderstand the investor base.”
Ghana will consider a syndicated loan from private banks as well as multilateral and bilateral borrowing if market conditions deteriorate to an extent that a Eurobond becomes untenable, according to the Finance Ministry.
The West African nation has done a lot to reform its fiscal situation, which includes limiting pay increases for civil servants to below inflation and allowing free movement on the price of fuel, Bailey-Smith said. The nation’s dollar debt has returned 16 percent this year, more than the 10 percent average for sub-Saharan African nations.
“Ghana still benefits from a more positive sentiment than the majority of sub-Saharan African Eurobond issuers,” Bohlund said.