Ghanaian Minister of Finance, Kenneth Nana Yaw Ofori-Atta has announced that the nation is suspending interest payments on its foreign debts and aims to explore International Monetary Fund (IMF) bailout.
As expected, this development caught bondholders by surprise and effectively defaulted as the country struggles to plug its vast balance of payments deficit.
Ofori-Atta explained that the county will not service debts including its Eurobonds, commercial loans and most bilateral loans, calling the decision an “interim emergency measure”, while some bondholders criticised a lack of clarity in the decision.
The finance ministry added that the government “stands ready to engage in discussions with all of its external creditors to make Ghana’s debt sustainable.”
The suspension of debt payments reflects the undesirable state of the country’s economy, which had led the government last week to reach a $3-billion staff-level agreement with the International Monetary Fund (IMF).
As gathered by Theliberationnews, Ghana had already announced a domestic debt exchange programme and said an external restructuring was being negotiated with creditors. The IMF has said a comprehensive debt restructuring is a condition of its support.
That announcement led to a crash of Ghana’s Eurobonds on Monday. The country’s Eurobond due 2025 fell by 4.25 dollars with investors asking for a yield of 76.94 per cent; the bond due 2026 lost 7.25 and a yield of 79.34 per cent.
The government said the suspension will not include the payments towards multilateral debt, new debts taken after Dec. 19 or debts related to certain short-term trade facilities.
How downgrade by rating agencies compounded woes
The country has been struggling to refinance its debt since the start of the year after downgrades by multiple credit ratings agencies on concerns it would not be able to issue new Eurobonds.
That has sent Ghana’s debt further into the distressed territory. Its public debt stood at 467.4 billion Ghanaian cedis ($55 billion as per Refinitiv Eikon data) in September, of which 42% was domestic.
It had a balance of payments deficit of more than $3.4 billion in September, down from a surplus of $1.6 billion at the same time last year.
While 70% to 100% of the government revenue currently goes towards servicing the debt, the country’s inflation has shot up to as much as 50% in November.
Its gross international reserves stood at around $6.6 billion at the end of September, equating to less than three months of imports cover. That is down from around $9.7 billion at the end of last year.
The inevitable
Kathryn Exum who co-leads Gramercy’s Sovereign Research department said: “Ghana is doing roughly what could have been expected, but they’re not making any friends in this process, especially not with external creditors. They have become less and less amicable throughout the process,” the bondholder said.
Ghana’s external bonds, which are trading at a deeply distressed level of 29-41 cents in the dollar, dropped with the 2034 bond losing more than 3 cents, Tradeweb data showed.
Nonetheless, some investors said the suspension of external debt payment was expected.
“It is in line with Ghana getting into talks about restructuring with various debt holders, so not coming out of the blue,” Rob Drijkoningen, co-head of emerging market debt at Neuberger Berman, which holds some Ghanaian Eurobonds.
This will affect investment inflow into the country, says Dr Austin Nweze, an economist at the Lagos Business School.
“If they don’t meet the obligations on those bonds, it will affect subsequent investments in the country. Investment is about confidence,” Nweze told Daily Trust.
In what analysts have described as a bold move, the debt conversion plan indicated that holders of the new bonds would receive zero coupons in 2023, 5% in 2024, and 10% in 2025, until maturity.
These rates were set without regard to what coupons the former bonds carried. For Ghana, what matters now is its debt sustainability, given the high percentage of revenue that is being spent to service its debts.
On the Eurobond market, Ghana’s conditions are even more precarious. The former Gold Coast faces $500m maturing in 2025; $1bn in 2026, and $2bn in 2027 on its Eurobonds.
Reacting to these developments, S&P Global Ratings, for instance, in an obvious rejection of the debt conversation, categorised it as a “distressed exchange offer,” and equated the programme to a default.
Further, S&P lowered Ghana’s foreign debt score to CC from CCC+, with a negative outlook on the bonds.
Bond default: Why Nigeria must not be Ghana
Like Nigeria, Nweze said, Ghana’s problems arise from the country’s low productivity.
What is happening in Ghana is close to the current experience in Nigeria. This has raised a question as to whether it is a mere coincidence that Nigeria and Ghana, the dominant economies in West Africa, are facing hard times.
As in Ghana, so in Nigeria, debt servicing is currently gulping a large chunk of government revenue.
For Nigeria, local debt rose to N42.84 trillion by the end of June, 2022, rising from N41.60tn three months earlier, according to the nation’s Debt Management Office. Nigeria’s foreign debt was put at $40.06bn, with about $15b out of that being outstanding Eurobonds.
While Nigeria has not defaulted on its debt repayment obligations, there is a broad agreement on the fact that the current debt profile of the country, as in Ghana, is not sustainable.
The government has said the debt-to-GDP ratio of 23 per cent is well within the 40 per cent limit set by the government. It has also claimed that the current debt profile is sustainable, and on occasions, relevant government officials have declared that restructuring its debts is not an option.
But the changed revenue profile of the government has challenged the validity of these claims. As some analysts have observed, the government does not repay or service its debts from the GDP. Debts are repaid from revenue. This has been proved by the current low revenue flowing to the federal government coffers as a result of a fall in oil receipts.
