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Feb 1, 2015

Ghana’s GHS630m Bond To Test Investor Confidence


 

 

The Bank of Ghana has scheduled February 19 next month to auction government’s 3- year fixed rate bond to raise GHC630 million from the capital market to refinance government’s debts maturing in the first half of this year.

The amount to be raised next month is the first of two 3-year fixed rate bonds government has planned to issue this year.

The coupon rate for the bond is expected to reflect the highest competitive bid accepted at the auction for the security.

Aside from paying its maturing debts, the funds raised from the bond issuance next month will also be used to finance government’s liquidity challenges.

The Bank of Ghana further explained that raising the GHC630 million has become necessary because of the need to “roll­over maturities, restructure government debts, and also for liquidity management”.

Earlier this year, the Bank of Ghana revealed government’s intention to borrow GHC25.42 billion from the domestic market within the first six months of the year: an amount that is twice the GHC12.72 billion it borrowed through the issuance of government securities in the same period last year.

According to the government’s debt issuance plan for the first half of this year, in February alone it is expected to raise about GHC4.15 billion through various securities including Treasury bills, 1-year and 2- year fixed notes.

Analysts believe issuance of the first 3-year fixed rate bond offers investors a chance to reaffirm their confidence in the economy at a time when a plunge in world crude oil prices is posing significant risks to government’s fiscal consolidation efforts.

Already, President John Mahama has said that the country could lose almost US$700 million in revenue due to the fall in oil prices, a figure that could put government’s budget deficit target of 6.5 percent of GDP out of range.

It is thus feared that the risks posed to the economy could push investors to demand a higher interest rate on the bond and make government’s debt more expensive.

This year, government has budgeted GHC8 billion as interest payment for domestic debts – out of the total GHC9.5 billion – raising concerns that debt overhang may cause government to be unwilling to implement adjustment programmes that will promote economic growth, because a greater proportion of the benefits will end up as debt- service payments to creditors.

Development experts have thus urged government to use the borrowed funds judiciously, in particular for productive purposes so that sufficient growth can be generated to reduce the debt service burden and foster sustainability Anxiety about the country’s debt levels have heightened as economic growth has slowed and is expected to expand by 4.5% – below the targetted 7.1% in 2014.

Dr. Raziel Obcng-Okon, an economist who lectures at the Ghana Institute of Management and Public Administration (GIMPA), recently told the B&FT that an “unsustainable” debt service strategy could push the country into a debt crisis – a situation wherein it will be unable to settle its debts.

The country’s total debt stock as at September last year is about 60.8 percent of GDP, translating to more thanGHC69 bilIion including interest payments – which puts a seven strain on government’s finances.

This year, the amount government has set aside to finance interest payments on debt is more than the GHC8.3 billion it could possibly raise from external loans and grants.

“This means that all the loans and grants anticipated will only go to service the interest payments. Currently, Ghana is borrowing to refinance interest and principal repayments in an unsustainable manner,” explained Dr. Obeng-Okon. – BFT