Been-here-before feeling saps Ghana bonds amid $1.6 billion hole

Ghana investors are getting that deja-vu feeling.

The West African nation’s ballooning budget gap has dismayed investors betting the combination of a new government and an International Monetary Fund program would bring the country’s finances under control. The discovery of a 7-billion cedi ($1.6 billion) hole is reviving memories of 2015 when Ghana’s economy was in tatters amid a slowdown in commodity prices and excessive spending.

“There were some hopes that finally, under the previous government, and with the IMF’s watch, fiscal slippage wouldn’t have been that bad,” said Nicolas Jaquier, a London-based emerging-markets economist at Standard Life Investments Ltd., which oversees $1.3 billion worth of developing-nation assets including Ghana’s 2023 Eurobonds. “It’s more of a disappointment that it actually hasn’t changed.”

Finance Minister Ken Ofori-Atta dashed those hopes when he admitted the 2016 deficit may be close to “double digits” on Wednesday. An earlier forecast envisaged a maximum shortfall of 7.3 percent of gross domestic product. His comments pummeled Ghana’s August 2023 Eurobond, driving the yield up as much as 34 basis points and eroding the bond’s advance the previous year.

Investor expectations are high for the new administration under President Nana Akufo-Addo, who came to power in December with pledges of fiscal discipline to rein in inflation, currency depreciation and high interest rates. With budget deficits entrenched above 10 percent of gross domestic product and the currency sliding, the country was forced to turn to the IMF for an $918 million aid program in April 2015.

Ghana’s August 2023 Eurobond traded down for a fourth day on Thursday, leaving the yield four basis points higher at 8.48 percent as of 1:32 p.m. in the capital, Accra. Forward contracts suggest that Ghana’s cedi will weaken 3.4 percent to 4.452 per dollar in a month’s time.

Square the Circle

Jaquier said he had expected the budget deficit to come in lower than 7.3 percent.

“The risk is that the new government will struggle to square the circle on all its objectives: reduce taxes, stay current on the IMF program, consolidate the fiscal and reduce interest rates.” he said by phone.

A spokesperson for the IMF said it was informed about the previously undisclosed spending and would discuss the matter during its visit to Ghana next week.

 “It’s alarming,” said Karl Ocran, head of investments at Frontline Capital Advisors Ltd. in Accra, who correctly predicted the stock market’s performance last year and oversees 275 million cedis of assets including local bonds. “We could see a reversal of all the gains we made over the last couple of months. We thought the government didn’t overspend.”