Published On : Tuesday, August 30 2016
As Ghana heads towards national elections in November, the government of President John Mahama is taking a high-risk bet that international investors believe in its attempts to reduce spending and debt levels during a period when a change in government could be possible.
We need to have steady institutions and to be able to finance our election and policies without messing up public finances
The government has announced its intention to issue a $1bn eurobond by September, but keeps on equivocating about following through. The economy has been going through rough times since 2012, when the currency nosedived amidst power cuts and a huge government deficit.
Since then, Accra has faced diminishing returns on its eurobond offers – bonds issues in foreign currency – and the international climate is particularly difficult with the impact of the June Brexit vote in the UK on already meagre global growth prospects. Despite signing a $1bn International Monetary Fund (IMF) bailout in 2015, the government has not been spending within its means.
The local financial sector is worried about the future. Sampson Akligoh, managing director of investment bank InvestCorp, explains his concerns: "The core issue is public debt. The utility price deregulation needs to continue. We need to have steady institutions and to be able to finance our election and policies without messing up public finances. Despite the election, we shouldn't see surprises of projects being done out side the budget."
The IMF predicts that Ghana's debt-to-GDP ratio will rise to 74.1% by the end of the year, but it recommends that it should be below 60%. Even though the fiscal deficit dropped to 6.7% of gross domestic product at the end of last year – which was lower than the IMF's target of 7% – finance minister Seth Terkper said in June that the government needs $750m to meet the budget deficit and $250m for debt repayments.
Keen investors could be worried as election time typically leads to much higher levels of government spending in order to gain popular support. Professor Newman Kwadwo Kusi of the Institute of Fiscal Studies argues that Mahama will have to resist temptations like scaling back taxes and restoring consumer subsidies to win over the electorate, which is calling for the government do something about infrastructure deficits and weak public services.
Ghana's international borrowing is getting more expensive. Ghana's 2015 $1bn eurobond was oversubscribed, but with a coupon of 10.75%, which is the highest rate for an African eurobond and higher than the 8% of its first eurobond in 2007.
The government expressed concerns about the higher costs of eurobonds due to weaker investor confidence, with the finance ministry saying on 5 June that low prices for Ghana's oil production and other concerns could make it turn to private loans instead. Two days later, finance minister Terkper said that there could be a new eurobond as early as July and as late as September but has been talking the issue up since last year without any action.
Timing is key
Professor Kusi explains the government's challenges: "Uncertainty and risks surrounding the eurobond are likely to be heightened close to the elections. The likelihood of having a difficult eurobond issue as late as October in terms of subscription and price is, therefore, high. The worst scenario would be for the government to resort to central bank financing, which would breach an important condition of the [IMF deal] and may send the programme off track."
Raising money on the local markets is much more expensive as interest payments can be around 25% per annum, but repayment is not subject to currency risks, as eurobonds are. The government cancelled the issue of several local bonds last year over cost concerns. In June, the ministry of finance sought to issue ¢500m ($126.3m) in domestic bonds but attracted investment of just ¢350m. It was the third local bond floated this year.
Borrowing for bailouts
Other African governments have raised eurobonds to finance infrastructure, and some investors are worried that Ghana's money will not be going into money-generating projects. The government also announced in June that it wants to issue $2bn in syndicated bonds to address the high levels of debt of state-owned companies, including the Volta River Authority and GRIDCo, in the troubled electricity sector.
The petroleum ministry said that a new 10% levy on electricity tariffs would be necessary to ensure the government can make the bond payments.
Analysts say that they are not too concerned about the potential for drastic policy changes, no matter who wins the election, but all of the borrowing could leave future governments in trouble if they do not have a good plan to raise the funds to repay. Investcorp's Akligoh points out:"All the governments, more often than not, have been pro-market. It is only the intensity and the approach that is different. We will continue to see an open economy, with minimal restrictions on capital flows."
Repayment of Ghana's initial $750m eurobond is due in 2017 and there are risks that the government will seek to pay back borrowed money with a rollover eurobond that would have even higher costs.
Other financial problems are likely to take up a lot of the campaign as three-time presidential also-ran Nana Akufo-Addo seeks to replace Mahama. The tough economic climate has led to a rise in non-performing loans (NPLs) in the commercial banking sector. A report by Moody's in June recorded NPL rates of 14.7% at the end of 2015, up from 11% at the same time the previous year, negatively impacting the banks' ratings.