Concerns over Ghana’s
external debt keep increasing as it increased by the US$750 million Eurobond this
week. This is what remains after US$250 million outstanding debt was bought
back from the original issue of US$1 billion relative to the first Eurobond
Issued in 2007 and due to mature in 2017. Although commentators and analysts especially
Dr. J.S. Abbey (Executive
Director of the Centre for Policy Analysis, - CEPA), described
this issue as bad and wrongly “timed1”, it is yet to penetrate
through the Government’s propaganda defense mechanism; as Government
functionaries as usual have sought to remain resolute about Government’s
opinion of the “great deal” it has executed for Ghana. Contrary to this
opinion, it has been argued by some investors that “the opportunity cost loss is at least $100 million on
a net present value basis. That's four district hospitals if you want it in
social terms." –unnamed investor cited in the Reuters article on
myjoyline.
Two main issues have
been the matter of critique. First, this Eurobond was issued at a premium to the 2017 instrument (1st
Ghana Eurobond issued in 2007), currently trading at around 6%. Secondly,
demand for Ghana’s bond although over-subscribed by $1.2 billion; relatively underperformed compared with
Zambia and Nigeria’s issues about a month ago. According to the Deputy Minister
of Information, Mr Felix kwakye Ofosu; “ … the over-subscription of the Eurobond demonstrated the
level of confidence that the investment community had in Ghana…”. He may be right to some extend if
competition between nations for investment is held constant. As stated above, demand
for Ghana’s issue UNDERPERFORMED relative to Zambia and Nigeria’s issues. This
means that, many more investors at least are willing to invest in Zambia and
Nigeria than in Ghana; which I believe the Honourable Minister knows very well;
so why the half-truth been told?
Another comment that attracted my attention was made by the Honourable
Minister for Finance and Economic Planning, Mr Seth Terkper and Dr. Henry
Wempah (Governor of the Bank of Ghana) concerning why the Eurobond was issued
at a premium. They explained that contrary to popular assertions of Ghana’s
weak fiscal and macroeconomic fundamentals, the determining factors were
external; as “It's primarily about the
unfavourable general conditions globally". Once again, this is half
truth as debunking the “weak fiscal and macroeconomic critique” is
unsustainable as the latter factors could influence the probability of default
practically. Now, by blaming it on external factors and not “Ghana’s risks”; as Dr. Wempah told the
Reuters as reported on myjoyonline raises the question as to what Ghana’s risks
are? The Reuters had explicitly attributed the premium to Ghana’s
fiscal and current account deficits. Budget deficit surged to 11.8 percent of
gross domestic product in 2012, up from 4 percent in 2011, partly as a result
of public wage increases. Besides the budget deficit, Ghana's current account
shortfall has also expanded, to $4.92 billion or 12.3 percent of GDP, from
$2.15 billion in 2007. Public debt increased to 49.4 percent of GDP in 2012,
from 40.8 percent in 2011, “higher than peers such as Nigeria”
which has a debt-to-GDP ratio of 18.6 percent (ibid.).
In anyway, as concurred earlier, the Finance Minister and the
Governor of the Bank of Ghana could be partially right about the attribution of
the premium to external factors and not “solely”
on internal macroeconomic factors. This is because one of the possible risks
that international investors would have had to contend with is currency risk
which is substantial in Ghana due to high and volatile inflation and exchange
rate regimes. However, this is no problem because the Eurobond is denominated
in US dollars, which is a hedge against currency risk relative to Ghana’s
macroeconomic instability.
There are a number of issues not addressed by these two servants
of the state with respect to Ghana’s risk factors, which down plays Ghana’
internal environment as the cause of the premium. In this article, I assert
that the premium Ghana paid could have resulted from country risk underpinned
by political risk and capital market illiquidity. This is discussed by applying
the Capital Asset Pricing Theory (CAPM) and other bond pricing considerations
from extant literature. CAPM simply enables the estimation of expected return of an
investment based on its risk sensitivity relative to the market. Hence, a bond
with the same risk sensitivity as the market earns the same return as the
market portfolio. At worst, this hypothetical bond should be priced at par;
that is, its interest (coupon) should be the same as the prevailing market rate
of interests. On the contrary, a bond is traded at a premium when its interest (coupon)
is higher than the market interest rate. By CAPM analysis, the bond is riskier
than the market portfolio; hence, the higher required return – the risk premium
(excess return) above the expected market return to compensate investors for
the additional risk they will bear. Could this be because Ghana is rated B by
Standard and Poor's, B1 by Moodys and B+ by Fitch, which revised the country's
outlook to negative from stable after the government announced a surge in its
deficit?
Therefore, trading Ghana’s Eurobond at a premium meant that the
issuer (Ghana) is riskier than the market (International); which indeed is
directly correlated with the risk of default on the bond. For this reason, the
country is expected to pay investors, an interest of 8 percent; which is higher
than the 6.5 percent Nigeria had in a similar move and Rwanda's 6.8 percent.
Once again, did Nigeria get a lower coupon rate because of it lower debt-GDP
ratio? An investment is said to be risky if the issuer is likely to
default on the payment of interest and principal. Is Ghana risky? Indeed Ghana
is risky and I contend that contrary to the Finance Ministers assertions, these
risk considerations could be internal and not primarily external. According to
Daniels and VanHoose (2005), “risk
premium refers to interest rate differences resulting both from diverging
degrees of default risk and from distinctive levels of liquidity”. From the analysis above, the risk premium is a
spread, which according to Chrisholm (2002) is “partly determined by the credit rating of the Issuer (i.e. Ghana) and
partly by the appetite of the market for the investment in current market
circumstances”. This cause and effect attribution supports popular concerns
especially by Dr. J.S. Abbey about Ghana’s poor credit rating as a possible
decoy.
Deductively, the factors that can cause Ghana to default on the
Eurobond are much stronger reasons for the premium payment. Again, Daniels
and VanHoose opines that country risk can account for risk premiums on bonds
issued by various nations for reasons other than political uncertainty. Country
risk interchangeably is political risk; but distinctively, the former
encompasses the later. The ongoing election petition is an enviable feat in the
annals of democracy in Africa and the world over, as the principles of our
common democratic dispensation are tested. Nonetheless, this in addition to Ghana’s
history political risk underpinned by blood thirty political upheavals largely
through military coup d’états keeps haunting these international investors;
although the nation has made promising strides in recent times.
The high probability of
political risk is worsened by the hyperbolized colouration and presentation of
the petitioners as a group “desiring
power by all means”; even through the possible orchestration of civil
disturbances. That is to say, a verdict in favour of the incumbent President is
likely to result in political disturbances; as recent utterances by some
irresponsible politicians seem to perpetuate and guarantee this undesired
expectation. Hence, the higher interest required from Ghana in relation to
Nigeria and Zambia. Further, country risk can manifest itself in the form of
illiquidity; defined as the ease as reflected in the length of time it would take
in converting an investment, in this case the Eurobond into cash; and the
consequent influence on its price. Hence, a lengthy period means high
illiquidity which could reduce the price of the Eurobond if investors attempt
to sell it in the secondary market; resulting in capital losses to investors.
High illiquidity could
be because fewer investors are willing to take up the extra country risk
(Daniels and VanHoose, 2005). This could be the situation Ghana finds itself in
expectation of the verdict on the election petition; as there is already a
perception of huge political risk. Moreover, it is a great initiative to list
the Eurobond on the Ghana Stock Exchange (GSE); but in my opinion, the benefits
to the Ghanaian economy could not offset the fact that relative to more vibrant
and developed international stock markets like the London Stock Exchange and
the New York Stock Exchange beside others, the GSE is relatively illiquid. This
was worsened by the underperformance of the GSE in recent times relative to its
competitors.
The situation could not
even be saved the intent to list on the Scottish Stock Exchange largely due to
the internal political risk in Ghana; which may have stay away investors in the
short-term and thus reducing possible trading volumes – the oversubscription in
relation to that of Nigeria and Zambia. Simply, there is an expectation of
supply exceeding demand in the secondary market in the long-run which may
result in a price reduction of the Eurobond; hence result in possible capital
losses to bearers (investors). Corroborating the above-analysis is the high
possibility of credit risk due to Ghana’s high existing external debt. All
these concerns work together to confirm the popular observation of the wrong
timing of this issue and the subsequent premium paid by Ghana. Does this
outcome justify Dr. J.S. Abbey’s earlier caution on the same matter?
Implications
of a “Premium” Eurobond for Ghana
Ghana is required to
make high interest (coupons) payments to these international investors. The
worse part is that, these interests are indexed to the US dollar, the currency
of the investment; which averagely keeps appreciating against the Ghana cedi.
Hence, Ghana could face a currency risk and would require efficient risk
management to reduce losses. In effect, Ghana’s interest payments would
increase every time the Ghana cedi depreciates to the dollar; which is likely
to be weekly. Hence, our external debt could incessantly increase to worsen our
credit rating further. I hope this is not treated ineffectively like the oil
price hedging issue that came up recently.
For a country that is
at risk of high existing external debts, the Eurobond will only add insult to
injury especially when the Government like most African Governments cannot
guarantee value for money (vfm) because of corruption. In fact, I have been
worried by the sheer fact that like always, the Government keeps borrowing
without a clear identification of how it would service these debts like
previous debts. This attitude in my opinion is because our Governments have no
sense of “investment” in expectation of a quantifiable return; but
rather, it raises resources to waste away on political promises and not on
actual development needs. So my question to the Government is; what is the “
expected return” from the so-called 157 road projects that would be
funded by this debt facility?
Conclusion
In summary, the current
election petition exacerbating Ghana’s current default risk profile; which is
underscored by high perceptions of country risk evident by a huge political
risk and illiquidity of the Eurobond could also have accounted for the premium
paid by Ghana on the issuance of its Eurobond. These are internal,
country-specific factors in contrast to the explanation given by the Finance
Minister and the Governor of the Bank of Ghana. This article is in solidarity
with the earlier concerns on Ghana’s deficits and credit rating as possible
causes as the premium paid by Ghana given the evidence-based presented
above.
Kenneth A.
Donkor-Hyiaman
MPhil
Planning Growth and Regeneration
University
of Cambridge
United
Kingdom
kwakuhyiaman@gmail.com
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