Government appetite for debt swells- Plans to raise US$3.36bn despite IMF caution

In spite of a recent advice by the International Monetary Fund (IMF) for the country to limit its next Eurobond to US$500 million, the GRAPHIC BUSINESS is reliably informed that the government is boosting its appetite for foreign debt, with a planned incursion into the international bond market to raise some US$3.36 billion in bonds by December this year.

Of the total amount, US$3.25 billion will be raised through the issue of Eurobonds while the remaining US$113 million (GH¢500 million) is to be issued as a global depository note (GDN) – a debt instrument issued by a deposit bank but denominated in a local currency. Proceeds of this issue are to be used to retire “expensive domestic cedi-denominated debts.”

While admitting knowledge of the plan, the Resident Representative of IMF, Ms Natalia A. Koliadian, told the paper that the country needed to “remain cautious” with new borrowing.

With public sector debt-to-gross domestic product (GDP) ratio still close to 70 per cent of GDP and debt service to tax revenue exceeding 40 per cent, she said the country needed to raise domestic revenue mobilisation and reduce the cost of refinancing existing debt to help enhance debt service capacity and create fiscal space for the government’s development agenda.

“In order to preserve debt sustainability, the authorities need to limit non-concessional borrowing to finance high priority infrastructure projects, which would add to the economy’s growth potential,” Ms Natalia said in an email response to questions.

She was, however, yet to respond to another question on the ability of the economy to contain the planned US3.36 billion new debts, relative to the macroeconomic framework and the debt sustainability framework (DSF) due to be approved by the IMF’s Executive Board in April.

Details of issuance

The Eurobonds are to be issued in three tranches over the next nine months, with the first tranche of US$1 billion, which will be the country’s sixth, expected to be sold before the end of June.

Proceeds of this issue will be used to finance commitments announced in the 2018 budget, one source familiar with the discussions told the paper in confidence.

Another Eurobond worth US$1.5 billion is programmed for liability management – restructuring, pay down and buy back of previous Eurobonds due to mature in 2022 and 2023, the source said, citing official communications.

Between now and 2023, two of the country’s Eurobonds, with a combined face value of US$1.75 billion, will mature.

Of the amount, US$1 billion is due to mature in 2023, while repayment of a five-year US$750 million Eurobond issued in 2016 will start from 2020 into 2022.

One of the sources explained that “the understanding is that if we are able to get a good rate for those issues, then we can use the proceeds to retire the earlier issues, especially those due to mature in two years or five years’ time.”

Tenure of bonds

On the US$750 million that will remain from the Eurobonds planned for the period, the source said it was “likely that it will be securitised against a commodity.”

“It is yet to be concluded but the discussion around that bond is such that it may be a commodity-backed bond in the sense that it will be securitised against earnings from one of the commodity streams,” the added but declined to give details.

It is expected that all the bonds will have tenures spanning five years to 10 years.

Economists worried

The decision to raise US$3.36 billion through the sale of sovereign bonds is part of a broader strategy by the government aimed at restructuring the public debt to help create fiscal space for manoeuvring.

It is understood that the Economic Management Team (EMT), headed by the Vice-President, Dr Muhamudu Bawumia, has been briefed on the planned issuance, paving the way for the Ministry of Finance to begin processes leading to a float.

For some analysts, however, the debt programme represents a strong attempt to borrow the country out of debt, a strategy that is unsustainable.

Two economists, Prof. Peter Quarter of the Institute of Statistical, Social and Economic Research (ISSER), and Dr Said Boakye of the Institute for Fiscal Studies, said in separate interviews that the current debt stock made it worrying for the government to programme such issuance over a nine-month period.

“The debt-to-GDP ratio is close to 70 per cent and, therefore, we need to be cautious, going forward. By going for more Eurobond, I think it will worsen the already weak situation,” Prof. Quarter, who is an economics professor at ISSER, said.

Dr Boakye also explained that it was curious for the government to borrow now to pay off a debt that will mature in 2022 and 2023.

With the cedi stability yet to gain currency, the Senior Research Fellow at IFS feared a heightened demand for Eurobonds could “throw the entire country overboard again and the debt service cost will be blown out.”

Between January and September last year, the debt stock went up by US$3.8 billion of which US$1.4 billion is external debt.

Debt trap

Beyond being a defiance of the IMF’s request, government’s planned debt raising programme for the year will surprise many analysts and economists, given the growing concerns about debt numbers in recent times.

Of particular concern is the debt servicing cost which currently saps about 42 per cent of tax revenue.

In a paper titled: ‘Ghana’s growing public debt and its implications for the economy,’ the IFS said the country now “faces a high risk of debt distress and increased overall debt vulnerability.”

“The country has fallen into a debt trap as real interest rates continue to surpass GDP growth rates, which has forced the country to continue committing more of its tax revenue to service debts.”

It further warned that the country risked falling back into an extended debt trap, with economic stagnation and possible increases in poverty rates and failure to implement the Sustainable Development Goals (SDGs)

An earlier report by the World Bank also noted that Ghana was “likely to face higher financing costs in both the domestic and external markets in the context of a strong US dollar and rising global bond yields.” –GB