All you need to know about Ghana's Eurobonds

The author: Jelili J. AFOLABI

There are several advantages that Eurobond brings to the issuing country. The main advantage is to increase the liquidity and protect the market from large shocks and erratic volatility in the market.

Most countries also issue Eurobond to reduce the dependency on international aid, grants and loans from multilateral parties to attain the long term objective of becoming self-dependent. In spite of these advantages of Eurobond, the issuing country needs to maintain a fiscal discipline in its economic management before Eurobond issuance.

Eurobond is an international bond issued in Europe or elsewhere outside the country in whose currency its value is stated (usually the US or Japan). It is usually denominated in a currency other than the home currency of the country or market. Eurobonds have three elements composition; the issuer, what is the denomination of the bond and where it is issued and the word Eurobond has nothing to do with “EURO” but rather signifies the INTERNATIONAL nature of the bond. A Eurobond is a promissory note, issued on the European money market by the government of Ghana asking people or companies with money to lend her money on the promise that the Government will pay it back in X-number of years with interest.

It is on record that Ghana was the first sub-Saharan African country other than South Africa to issue an international bond. Since then, it has been joined by Gabon, Senegal, Ivory Coast, Congo Republic, Nigeria, Namibia, Zambia and now Rwanda.

Advantages/Benefits of Eurobond

Eurobond mostly is used to support GDP growth and help attract more investment. The proceeds generated are partly used to pay off existing debts and increase the fiscal economy by reducing government pressure on using domestic loans for debt management. Proceeds of Eurobond when used to finance strategic investment and development will help attract more investors/investment into the country and create employment since these investments will need additional man power. Eurobond also reduce government pressure on domestic capital market and give room for more private sector organizations to have access to both financial and non-financial loans for their business.

Ghana’s Eurobond History

Ghana has issued four different Eurobonds already for varied reasons and now on the road to issuing yet another Eurobond which will be the fifth 5th in nine (9) years. The first bond for 750 million dollars was issued in 2007 at an interest rate of 8.5 per cent to be repaid in 10 years.

The second bond was issued 2012 for 1 billion dollars at 7.875 per cent interest with a 12-year maturity.

Launched in September 2014, the third bond is for 1 billion dollars at 8.125 rate of interest payable in 12 years was issued.

The President of the IMF, Christine Lagarde, had, before the issuance of the third bond, warned Ghana against it. She had said that Ghana would be accumulating too much debt if it issued a third bond. According to her, the issuance could harm the economy. The IMF President at the time said: “Increasing yields on the bond was an indication that the investors saw the bonds as high risks”. She added, “Probably to those two messages (high yields and risks), the government should be attentive and cautious about overloading the country with too much debts.”

In spite of all these, the managers of the economy went ahead to issue the fourth Eurobond at a coupon rate of 10.75 for 15 years which was described as one of the highest in the region. The country’s total debt as at December 2015 stood at 94.5 billion Cedis which was 72 % of GDP, according to the BoG site.

The Economy of Ghana as at August Ending 2016

These are some economic highlights of Ghana’s economy as at the ending of August 2016.This is very important for investors, financial institutions and business persons. Source BoG site.

Government Debt to GDP 67.60%
Inflation.CPI (consumer price index) 16.7%
Monetary Policy Rate (MPR) 26%
Government Revenues GHS2,686.10 million
Government Spending GHS3,393.46 million
Government Budget of GDP -6.70%
Exchange rate of USD ($) GHS3.97 for a $1
91-day T/Bill 22.869%

The 5th Eurobond

The government of Ghana has issued yet another Eurobond to raise $750 million to pay some maturing debts and also support the fiscal economy of the country. I am asking if the economic indicators are good and the timing favorable for the country. There are a lot of speculations as to what the coupon rate of 9.25% has on the economy and interest paying on debt considering the above highlights given on the economy. What will this 5th Eurobond if issued do to Ghana’s debt and what impact will it have on the investor confidence in the country? What will be the impact on the credit rating of the country which currently is 31.25%.

Impact of the 5th Eurobond on the Economy

It is very unfortunate that the managers of the economy are adding more debt to the already huge public debt of our country. With the addition of the $750 million Eurobond, Ghana’s total public debt is now GHS 110 billion. This simply means that the interest payment by Ghana will be very high. The Debt to GDP will also surge upwards which will mean the country is likely to be a Heavily Indebted Poor Country (HIPC): countries without much money whose governments owe a lot of money to other countries and international banks
Again, if the funds are used prudently for the country to derive benefits, successive government will have to borrow more to meet maturing bonds and this will impact negatively on economic stability of the country.

Conclusion

A peaceful country with over 22 years of Democratic governance and all the natural resources ie. Cocoa, gold and oil is still not self-independent. The oil producer in 2015 signed a three year Extended Credit Facility (ECF) program with the IMF to raise some $988million to restore fiscal balance to the economy. I ask a question; when will the country get better with all this financing and resources?

What will the 10year local currency bond that government plans to issue to raise GHS200 million do to the economy and what will be its impact on the private sector. What is happening to the third IMF review with government? These are questions left unanswered. ‘Self-reliance can only be achieved when resources are put to good use and loopholes in government blocked’~~Jerry Jelili AFOLABI.

By Jelili J. AFOLABI | [email protected]

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