A sharp rise in borrowing costs for Ghana reflects a dramatic tightening of access to global capital markets for sub-Saharan African countries.
On October 7 the West African nation issued $1 billion in 15-year eurobonds at an interest rate of 10.75 percent. The maturity was the longest ever achieved by a sub-Saharan African country outside of South Africa, but the issue also had the more dubious distinction of offering the highest yield ever by a sovereign borrowing from the region, notwithstanding a partial guarantee from the World Bank. Only last year, the country was able to sell ten-year eurobonds at a yield of 8.25 percent.
Ghanaian officials had met with international investors in September in an effort to raise ten-year funds at a rate of less than 10 percent, but a deterioration in global liquidity conditions and Ghana’s own economic woes ultimately drove up the cost.
Other African countries are also feeling the squeeze. On the same day that Ghana announced its sale, Angola called off plans for one of its own and said it would issue local debt instead. And in July Zambia issued a $1.25 billion, ten-year eurobond at a yield of 9.375 percent, 75 basis points more than it paid for a similar issue in 2014.
The latest issues mark the end of an eight-year period of ample and easy access to global capital for the region, which Ghana kicked off in 2007 by becoming the first sub-Saharan African country to tap the eurobond market. At that time, debt relief programs had repaired the balance sheets of many governments in the region, and strong global growth and rising commodity prices were lifting their economies. African countries were eager to borrow to fuel their development, and international investors desperate for yields were happy to snap up the paper.
Today the story is starkly different. Commodity prices have plunged, global growth has slowed, and capital has fled emerging markets for the perceived safety of developed markets. Africa has been particularly hard hit because of rising debt loads in many countries, and bankers and analysts don’t see conditions improving any time soon. “It’s already affected the pipeline,” said James Nelson, head of Africa debt capital markets at Standard Chartered Bank in London, which helped arrange Ghana’s bond issue. “There will be a lot of sovereigns that maybe choose alternative forms of funding.”
Despite concerns about the high interest rate, Ghana proceeded with the sale because it is a key element of the government’s plan to repair its finances after several years of budget blowouts and disappointing receipts from its main exports — oil, gold and cocoa. In April Ghana arranged a $918 million bailout package from the International Monetary Fund, which agreed that the country should sell up to $1.5 billion in dollar-denominated debt this year. The proceeds will be used to repay existing local currency (cedi) debt. The government currently pays rates of around 25 percent on its cedi debt, and can issue for maturities of only three years or less.
In the absence of a eurobond deal, the government would have had to borrow locally or take austerity measures such as public sector layoffs or wage cuts, said Sampson Akligoh, managing director of the Accra-based investment firm InvestCorp. Such moves could have been political suicide for President John Mahama’s National Democratic Congress party going into the 2016 general election. Borrowing on the eurobond market carries risks, though, he added, because it increases Ghana’s currency exposure. The cedi, which currently trades at around 3.78 to the dollar, has declined by 12.4 percent over the past 12 months. “It’s also not a good benchmark for the private sector,” Akligoh said. “For companies that borrow in dollars it’s an issue.”
So far the country is on track to meet fiscal targets set with IMF under the bailout. The government has cut spending, closed some tax loopholes and implemented legal reforms to improve tax revenues, and adopted wage and hiring freezes as part of its reform efforts under the program.
Meeting the program’s targets will likely require an elimination of the election-year budget overruns the country has seen in the past. Philippe de Pontet, lead Africa researcher at political risk consultancy Eurasia Group, said early indications are that the government’s fiscal discipline could persist through the election cycle this time. The government recently announced it would make only a modest increase in prices for cocoa farmers for the 2015–’16 growing season, he noted. “The constrained price increase suggests that the federal government will not use cocoa prices to buy votes in the 2016 election,” de Pontet wrote in a recent research note.
External conditions weren’t the only factor in pricing Ghana’s bond. Employing an unusual partial guarantee, the World Bank will pay investors up to $400 million in case of default. It was the first such guarantee of its type on a sovereign bond since an offering by Colombia in 2001. According to Standard Chartered, the bonds are expected to be rated B1 by Moody’s and BB– by Fitch, which would be two levels higher than Ghana’s sovereign rating. The guarantee could dissuade some investors, though, because it may mean the bond will be excluded from the JPMorgan Emerging Market Bond index. But Standard Chartered’s Nelson said that if factors such as liquidity are shown to meet the JPMorgan index rules, it could be included. He cited an Angolan transaction in 2012 called Northern Lights III, a loan through a special-purpose vehicle that was repackaged and sold to investors, which was later included in the index.
With global conditions making it difficult for African countries to tap the eurobond market, the World Bank is keen to provide more guarantees, said Pankaj Gupta, global head of project finance and guarantees there. “These are exactly the kind of market conditions where we can step in and help our clients to access finance,” he said.