World Bank insures Eurobond against risk default

Government has secured a US$400 million partial risk guarantee from the World Bank against its highly anticipated US$1.5 billion Eurobond floatation.

This is a credit risk to assure investors that the World Bank is liable for their investment in case the country defaults to its creditors.

The insurance against risk has been necessitated due to the downgrading of the country’s credit ratings.

International rating agency Moody’s in March this year pushed further down the country’s rating, after Finance Minister Seth Terkper announced the crippling effects of the tumbling crude oil prices.

Ghana’s sovereign foreign-currency rating was lowered one step to B3, six levels below investment grade.

Credit rating fell

“The negative outlook reflects further downside risk to the country’s debt dynamics and liquidity pressure in the short term if the country is seen as a high credit risk.

The move is the second downgrade by Moody’s in less than a year for a nation that has agreed to a US$1 billion loan from the International Monetary Fund (IMF).

While Moody’s outlook is not promising, Standard and Poor’s assesses Ghana at an equivalent B-, while Fitch Ratings has it one grade higher, at B.

The Finance Minister, on July 22, announced that the government had increased the size of a Eurobond this year to US$1.5 billion, some US$500 million more than originally planned. The money would be used to finance maturing debts and support the budget.

Economic growth cut

The government also cut its economic growth forecast and widened its budget deficit estimate due to weak commodity prices.

Economic growth is now expected at 3.5 per cent, down from a previous forecast of 3.9 per cent. Output has been hit by a disappointing cocoa harvest and weak gold prices.

Analysts say if the proceeds of the Eurobond are used to retire more expensive domestic debt, it will be seen as good news - and vital to putting the country on the path towards some sort of debt sustainability.

"This is especially the case if the World Bank is providing a partial guarantee of the Eurobond, which will otherwise blunt the higher borrowing from Ghana," the Head of Africa Research at Standard Chartered Bank, Ms Razia Khan, said.

"Without retiring very expensive domestic debt, it is not clear how debt sustainability will be achieved," she added.

Funding diversification

But Mr Terkper explained that the US$ 1.5 billion Eurobond was part of government’s strategy to diversify funding sources and lengthen the maturity profile of the debt portfolio.

According to him, part of the money raised would be used to buy out the US$ 750 million Eurobond issued in 2007 which would be due for payment in 2017.

In view of this, Mr Terkper said domestic interest payment would be lower than previously estimated while foreign interest payment would be higher than previously projected.

He said that steps taken by the government to stabilise the economy were beginning to yield dividends. The cedi currency rallied significantly in July after slumping more than 26 per cent in the first six months of the year.

“The bold measures we have taken since 2013 have restored confidence in the economy, resulting in the gradual and envisaged improvements in revenue performance and foreign exchange inflows," the Finance Minister said.

He said the government was seeking to cut 2015 total expenditure to GH¢40.3 billion cedis from an earlier forecast of GH¢ 41.2 billion.

Domestic Interest rates

Despite domestic benchmark interest rates set at 22 per cent by the Bank of Ghana, the government raised its end-year consumer inflation estimate to 13.7 per cent from 11.5 per cent.

Ghana’s economic prospects were bright at the start of the decade, helped by the start of oil production in 2010 and high prices for gold and cocoa, its traditional main exports.

Shortfalls in support from foreign donors after Ghana began oil production also played a significant role in creating the imbalances that led Accra to seek a $1bn rescue last year from the International Monetary Fund. From a high of 14.4 per cent growth in 2011, the government said the economy is now expected to grow at just 3.5 per cent this year.

Reversal of fortunes

In a reversal of fortunes that provides a cautionary tale for other natural resource-dependent emerging nations, wage overruns caused by public sector salaries accounted for 72 per cent of government expenditure in 2012.

Huge energy subsidy bills fuelled the fiscal deficits that crippled Ghana’s economy.

Hit by a stubbornly high fiscal deficit, rising inflation and a debt-to-GDP level close to 70 per cent, Ghana agreed to a US$918 million three-year programme with the International Monetary Fund in April.

That marked an abrupt reversal of fortunes for a country whose robust economic growth in previous years had marked it out as a darling of frontier market investors.