The government says it is not under pressure to refinance the country’s maiden bond issued in 2007 “at any price”, hence the decision to pause in pricing a new 2016 Eurobond until market conditions improve.
Speaking to the Daily Graphic about developments concerning the ongoing programme to refinance the balance of all or part of Ghana’s 2007 bond scheduled to mature in 2017, the Minister of Finance, Mr. Seth Terkper, said the government was developing the ability not to borrow on the international market at any price or interest rate.
That is mainly due to the setting up of the Sinking Fund and other government debt management strategies.
“It is important to note that investors have not rejected the bond and that the exercise has not yet been scrapped. The current position is that there is a pause in ‘pricing’ the bond because of the government’s stance that it will not refinance at any price,” he explained.
In 2015, a similar strategy was adopted, by which, unlike Ghana’s first three issues, pricing did not follow immediately after the government’s road show or interaction with investors.
Road show
Last week, the Minister of Finance led a delegation from the Ministry of Finance, the Bank of Ghana and advisors to meet with institutional investors in the United Kingdom (UK) and the United States of America (USA) to raise funds primarily to refinance the balance of 2007 sovereign bonds which mature in 2017 and other outstanding debts.
A statement released by the Ministry of Finance on Friday, after the meetings with investors, said the delegation realised that market conditions, especially the rate being offered by investors, continued to be unfavorable and so it was decided to pause in the pricing of the bond.
It said another reason was the desire of investors to get more clarity with respect to the IMF Board decision on the third review of the IMF programme.
Mr. Terkper gave some reasons for the stance the government took.
“One of the reasons is that Ghana has already refinanced approximately US$216 million of the original value of US$750 million from the proceeds of the 2013 bond issue.
“We have also utilised funds from the Sinking Fund established in 2014 to buy back or redeem US$33 million of the outstanding bonds in 2016, hence the balance of the bond is US$500 million,” he said.
This is the first time the nation has embarked on a “buy-back” programme, typically to redeem its bonds when they sell favorably, at par or at a discount, on the secondary international capital market.
Mr. Terkper further explained that during the 2016 mid-year review, it was announced that the government would continue to utilise US$100 million or more of the Sinking Fund and US$150 million of the balance of the 2015 bond proceeds to continue the “buy-back” programme.
Increased investor interest
He said the passage of the Public Financial Management Bill by Parliament had entrenched and improved the mechanism of the Sinking Fund as a key element in managing the country’s debt, in particular the sovereign bonds.
The Sinking Fund is primarily built up with proceeds from the country’s oil revenue after putting a cap on the Stabilisation Fund under the Petroleum Revenue Management Act (PRMA).
“The 2016 plan and the ongoing roadshow to raise funds to refinance the 2007 bond and other debts are exercises in fiscal prudence. It is also important to note that this is the best timing, since the next window after the summer will be too close to the general election.
“First, the bond is due for redemption in October 2017, not now; second, the state will continue to accumulate funds from the oil revenue to increase the balance in the Sinking Fund and, third, it will use the funds to redeem or support refinancing of the 2017 and other sovereign bonds.
“Investors have shown a high level of interest beyond the balance of US$500 million on the 2007 bond, but we are cautious about pricing. Hence these policies and measures buttress the point that Ghana does not have to refinance the 2017 bond at any price or interest rate,” Mr. Terkper explained.
Reasons for unfavorable rate
The minister further explained that the rate offered reflected conditions beyond the Ghanaian economic performance and included developments in the UK, the USA, emerging markets and sub-Saharan Africa.
He mentioned recent developments on emerging markets, as dictated by events in China, India and Brazil, in particular, recent global market events such as the exit of Britain (BREXIT) from the European Union (EU) and its impact on the union and the global economy.
Other developments, he said, included the recent decrease or drop in interest rate by the Bank of England, the decision by the US Federal Reserve not to increase or decrease the US policy rate and the projected sluggish growth in sub-Saharan Africa.
In contrast, however, Mr. Terkper said, the yields on Ghana bonds might only be taking account, gradually, of the true effect of factors such as the importance of Ghana’s new debt management strategy, notably the Sinking Fund meant to smoothen the humps and bullets, evidence of the emerging turnaround in the fortunes of the economy, as shown by stronger end-2015 (3.9 per cent) and 2016 quarter one (4.9 per cent) growth rates (despite setbacks in commodity prices) and improvement in the gas and power supply situation.
Going forward, he said, the prospects for the economy remained bright “on account of better expenditure controls, a rebound in domestic revenue mobilisation, the ongoing consolidation under the IMF programme, better prospects for cocoa and gold supply and prices, the start of supply (from this month) of crude oil (and later gas) from the TEN field, as well as preparations for similar supplies from the Sankofa (OCTP) field.
“The plans for Sankofa, notably the construction of a third FPSO, remain on course and recently Parliament passed the indemnity required to make the World Bank partial risk guarantee (PRG) for the project effective.
“It is on account of these and other factors that we remain convinced about the decision to pause in pricing the 2016 Bond, which is mainly to refinance the 2007 Bond but not at any price,” he said.
Mr. Terkper added that the delegation was also gratified to note that trading in government securities remained stronger, better and more active.
“We will continue with our debt management and market reforms to improve the prospects for Ghana consolidating its middle income country (MIC) status.
“Indeed, the yields, interest rates or price at which the external bonds are trading have also improved. This shows that once the Sinking Fund is sustained and managed well, our bonds will not have to be held to maturity and, therefore, refinanced at a high premium — that is, high price or interest rates,” Mr. Terkper said.
