Public debt faces steep rise
Businesses must brace for interest rate hike
Investors’ unwillingness to offer a lower yield on government’s US$1.5billion Eurobond could have dire repercussions for the country’s debt stock should government look to the domestic market to finance the deficit or reconsider the investors’ higher yields.
According to the IMF in its last month’s country report, in addition to about US$500million in loans disbursement for the second half of the year, the botched Eurobond issuance is expected to complete the external financing mix of the deficit.
Finance Minister Seth Terkper has insisted that external means of financing the deficit such as Eurobond issuance are a key part of its debt management strategy which among other things sought to ease pressures on the domestic debt market.
However, the latest setback on the Eurobond issuance could mean that government either accepts a higher yield — reported to be more than 11 percent — or look to borrowing from the domestic market to finance its capital investments.
A government delegation led by Seth Terkper, Finance Minister, and Dr. Kofi Wampah, central bank Governor, was in London, San Francisco, Boston, Los Angeles and New York to talk investors into the country’s Eurobond facility.
But after the road show, government decided to put issuance of the Eurobond on hold due to what it described as “unfavourable market conditions” for issuing the bond.
It is widely suspected that investors were asking for higher returns on the country’s new Eurobond, despite approval from the International Monetary Fund (IMF) and the partial risk guarantee (PRG) provided by the World Bank.
Currently, as it stands government has planned to issue GH¢2billion in net domestic financing for 2015 compared to GH¢7.3 billion (on proceeds basis) in 2014, of which GH¢2.3 billion was underwritten by the BoG.
Borrowing from the domestic market will not come cheap, as already government is having to contend with high-interest payments on debts contracted locally.
Over the past 14 months, government has been borrowing short-term at a minimum interest of 25 percent, contributing to a large interest burden on the total public debt stock.
As per the government’s plans as spelt out in the 2015 revised budget, total interest payment is estimated at GH¢9.34billion. Of this amount, GH¢1.6billion will be expended on external interest while GH¢7.7billion will be for domestic interest payments.
Considering that the bond sale was also intended as a debt management strategy, analysts argue that the failure to issue the securities could complicate plans by government to curb debt service costs and limit reliance on short-term borrowing in order to make the public debt more manageable.
Even before government’s planned Eurobond issuance hit a snag, ratings agency Fitch had raised grave concerns over the country’s rising interest payments amidst a decision to affirm Ghana’s debt rating a ‘B’ with negative outlook.
It noted: “High domestic yields and a 60% depreciation in the currency since 2012 have pushed up borrowing costs, with interest payments now accounting for one-third of government revenue — the highest level among Fitch-rated sub-Saharan African sovereigns.”
High interest service costs limit fiscal flexibility and will complicate consolidation efforts. Financing the deficit is expected to remain challenging, particularly with the IMF programme restricting deficit financing by the central bank to 0% next year.”
Effects on businesses
An economist, who pleaded anonymity, in an interview said, if the bond is confirmed as being shelved, the amount that can’t be raised will have to be borrowed domestically — since the budget deficit still has to be financed.
“That will put further pressure on domestic interest rates, potentially increase government interest expenditure, and intensify crowding out of the private sector,” he said.
Nana Otuo Acheampong, a financial analyst, added that without the Eurobond funds the economic terrain becomes riskier, and the currency risks running away and causing businesses to conduct affairs at a higher rate and cost than anticipated.
“The funds are needed to support the budget so that the deficit can be reduced; but if the deficit is going to increase, then it will affect the exchange rate of the currency. Businesses must now learn to tighten their belts,” he said.
One of government’s reasons for the Eurobond sale was to lower its interest expenditure because the Eurobond has a lower interest rate, and with currency stability the interest burden would be lowered.
“But if government now has to borrow domestically at an average of 25percent, then the interest payment out of budget will remain high or even increase marginally. This means interest rates would not fall soon and still remain high,” the economist added.
The economist described suspension of the Eurobond as “a significant blow to the government’s fiscal plan for 2015 and 2016”, because it was envisioned to finance certain capital expenditures and replace the more expensive domestic debt — but all of those plans now have been thrown into uncertainty.
Investors could ask for more
Nana Acheampong noted that should government go back to investors, they (investors) will be asking for a higher return than the one government frowned at.
He explained that with the inability of government to get the economic fundamentals right, an election beckoning and notorious over-expenditure in election years, and the first Eurobond due to be paid in October 2017, investors will deem Ghana a riskier destination and thus demand higher returns.
“We are in a riskier territory. The inability to get our fundamentals rights is killing us. Also, next year is an election year and since we have the penchant or trend to overspend in election years, then investors are worried.
“When you put all these together, the chances of getting a lower rate as opposed to what they have quoted now is extremely slim. You go back to them and they will ask for the same rate they are asking now, or they will ask for more.”