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Opinions of Sunday, 17 March 2019

Columnist: Toma Imirhe

Government faces severe financing crunch

*Seeks to issue multi-billion dollar Eurobonds imminently

*Reopens domestic 3-yr bond issuance just 2 months to maturity

*Seeks US$750m bridging loan from two int. banks

The Government of Ghana is facing a severe financing crisis, Goldstreet Business has learnt. To avert it top government officials, led by Finance Minister Ken Ofori-Atta have opened negotiations with potential investors in a planned Eurobond issue of up to US$3 billion, earlier this week, in London, New York and Boston.

At the same time government has re-opened a tap issuance for an undetermined volume of three year domestic bonds; but while this is a standard strategy, the fact that the original issuance, done in 2016, is due to mature just two months from now, in May, illustrates the intensity of government’s need.

But the biggest evidence of the immediate need for finance comes from government’s proposal to Parliament, made last week for approval for a US$750 million syndicated bridging finance loan, which is to be paid from the proceeds of the impending Eurobond issuance, which could become available within the next two to three months.

Government’s financing crunch has been brought about by the reticence of investors to buy up its debt securities. Aside from making it difficult for government to meet its budgetary deficit financing needs and repayment obligations on maturing public debt, the reluctance of foreign currency wielding non-resident investors to buy up domestic debt securities is instigating accelerated depreciation of the cedi which Bloomberg now rates as the worst performing of the 140 currencies it tracks, so far this year.

Government has appointed Bank of America, Merril Lynch, JP Morgan Chase & Co, Morgan Stanley, Standard Bank and Standard Chartered Bank Plc to organize the meetings with potential investors in its imminent Eurobond issuance, which started on Wednesday. It has also appointed local institutions, Fidelity Bank, IC Securities and Databank as co-arrangers for the issue, which could be done immediately if investors can be convinced to accept a coupon interest rate acceptable to government. If not, government officials are claiming they are ready to wait a bit for more favourable pricing to be secured. To this end the banks contracted are to arrange a benchmark dollar denominated bond issuance with maturities of between seven and 12 years or perhaps longer.

However, government cannot afford to be very patient – last week it proposed to parliament that it takes a US$750 million syndicated bridging finance facility being negotiated with two international banks – Standard Bank and Standard Chartered Bank Plc – which would be paid back from the proceeds of the impending Eurobond loan. Ministry of Finance officials explain that this is needed because even if the ongoing meetings result in a firm agreement with investors, securing the proceeds of a consequent Eurobond issuance could still be two to three months away. This implies that government would be forced into the best Eurobond deal it can get within the time frame provided by the tenor of the impending bridging loan.

Ghana needs US$2 billion to fund its budgetary expenditures inclusive of maturing debt amortization and is ready to take up to another US$1 billion to refinance existing bonds if it can secure a new issuance at relatively low interest rates. The primary target here would expectedly be the Eurobonds issued by the Mahama administration in 2015 at a coupon rate of 10.25 percent, the highest cost bonds on Ghana’s books. Specifically, Bloomberg reported this week that government is offering to buy back US$250 million of its US$2 billion in bonds maturing in 2023 and 2030.

However financial analysts are not sure that a pricing deal can easily be reached. Bloomberg reported earlier this week that analysts at Renaissance Capital, a global investment banking firm represented in Ghana, have formally warned its clients that Ghana has a “terrible fiscal record” in recent years. This refers to the two most recent general election years, in which the Mahama administration churned up unplanned fiscal deficits of nearly 10 percent of GDP on both occasions, each time nearly doubling the target for the year.

Added to this are fears that Ghana may abandon its fiscal discipline once the International Monetary Fund exits at the imminent expiration of its Extended Credit Facility programme, begun in April 2015 and due to end on April 4 this year. Although the incumbent President Nana Akufo Addo administration has passed legislation limiting the fiscal deficit to not more than five percent of GDP going forward, analysts and investors fret over the government’s turn from demand management to supply side economics; the fiscal deficit target was raised rather than lowered for the 2019 fiscal year for the first time since Ghana entered the IMF programme.

Even as government intensifies its efforts to secure dollar denominated funding it has also taken an unprecedented step to attract more foreign exchange through cedi denominated domestic debt bond issuance. Yesterday, March 14, it reopened a tap issue for the three year bond issuance done in 2016, and which is due to mature in May this year, just two months away.

The issue was originally done at a coupon rate of 24.50 percent which is significantly higher than the current three-year bond yield less than 22 percent. Under the terms of the offer there is no uniform clearing level; successful bidders will be allocated at the price at which they bid and partial allocations will go to bids at the cut off price at government’s discretion in event of oversubscription. It is similarly instructive that this tap offer is additional to the debt issuance calendar for the first quarter of 2019, which had one three year bond issuance, of GHc800 million slated for March.

Government’s ongoing difficulties are illustrated by the recent shortfalls it has suffered in its debt securities issuances. For instance, a fortnight ago it was only able to raise GHcx993.32 million, well below the target of GHc1.26 billion.