Ghana’s $1.5 billion Eurobond plan to test weary investor appetite

By:
Kanika Saigal
Published on:

As Ghana prepares to return to the Eurobond market, bankers say the sovereign’s debt sustainability will be tested, amid weak real-money appetite for frontier economies.

Ghana is set to return to the Eurobond market after parliamentary approval for the government to raise $1.5 billion over 10 years in external debt by September for refinancing and 2015 budget support. 

Derrick Mensah
  It will be difficult to tell how investors will react to the issue

Derrick Mensah,
African Alliance

The size of the issue is $500 million more than originally planned and will test investor appetite amid questions over the sovereign's debt-sustainability and progress in resolving economic imbalances.

London-based Rajiv Shah, director, debt capital markets, CEEMEA at BNP Paribas, says "any Eurobond will come at a price for Ghana".

He adds: "Ghana and Africa, more generally, is not trading too well at the moment. Ghana’s 2026 Eurobond, with an 8.7 year average life remaining, is trading at around 9.5%. For another 10-year issue by the country, I would expect the yield to reach double digits, which would be the highest yield issued by a sub-Saharan African sovereign.

"However, as Zambia’s deal last week showed, there is appetite for African sovereign risk even where there are substantial credit concerns."

Zambia went to the Eurobond market to raise $1.25 billion, with an 8.97% coupon with repayments in 2025, 2026 and 2027. The bond was two-times oversubscribed. Zambia’s first Eurobond, issued in April 2014, and was about four-times oversubscribed with a rate of 8.5%.

For Ghana's upcoming issue, $1 billion of the facility is ring-fenced for budget support and to reduce the reliance on short-term expensive domestic debts, while the rest would be used to refinance debts, including Ghana’s 2017 bond.

The World Bank has been in discussions about guaranteeing a portion of the bond sale, with some media discussions suggesting up to $400 million. 

"It will be a cautious line to tread, but with the World Bank guarantee, and IMF approval for the bond to be issued, the bond should be sustainable and in terms of debt-to-GDP levels, the government still believes this is sustainable," says Derrick Mensah, senior analyst at African Alliance, based in Ghana.

Ghana’s debt-to-GDP levels have eased slightly as the cedi – which has depreciated 30% against the dollar over the year – rallied 26% this month alone. As a result, debt-to-GDP levels declined from 68% to around 66% or C88.2 billion. On Monday, the cedi was trading 3.29 against the dollar in the interbank market.

Cedi to dollar 
Source: Bank of Ghana 

"But even with the guarantee from the World Bank, it will be difficult to tell how investors will react to the issue, given that many frontier funds are risk off Africa markets such as Ghana and Nigeria given macroeconomic headwinds," says African Alliance's Mensah.

Further reading
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In April, the government secured a $918 million deal from the IMF to stabilize the cedi and reduce the fiscal deficit. On the July 3, Ghana’s request to return to the international sovereign debt markets was given the go-ahead by the IMF.

Economic growth in Ghana is now expected to reach 3.5%, down from a previous forecast of 3.9% and Ghana’s export growth has been hit by a disappointing cocoa harvest, weak gold prices and low global oil prices. Estimated oil revenues this year were more than halved to C1.8 billion C4.2 billion.

The government has raised its deficit target to 7.3% of GDP this year from a previously estimated 6.5% due, in part, because of lower-than-expected revenues from the oil sector.