Business News of 2014-08-01

Gov’t to pay 25.4% interest on 3-year bond

The Bank of Ghana’s three-year bond issued on Thursday attracted a staggering high interest rate of 25.4%. This is the second highest rate for a 3-year bond this year. The central bank issued the bond to raise an amount of GHC 400 million.

With this high interest rate of 25.4%, the BoG will pay investors a total of GHC 101.6 million annually in interest and a total of GHC 304.8 million over the three-year period. The interest and the principal amount total GHC 704.8 million. The total interest payment is about 76% of the amount government has borrowed from investors.

Some analysts argue that unless the GHC 400 million is invested in a project that that could generate more than GHC 704.8 million in the 3years, government has no business borrowing at that rate.

As reported by Citi Business News early on, investors demanded a higher premium for the fast depreciating cedi which has devalued over 27% this year and the high inflation rate which is about 15%. Also, government’s likelihood to default has gone up because of its existing debts. This has accounted for the increase in the coupon rate to 25.4%.

The last 3-year bond was issued with a rate of 24.44%. Analysts have predicted coupon rates of government bonds could go as high as 30% next year considering the lineup of projects to be funded by debt and bonds to be issued.

What does this mean to the average person or business?

Your commercial bank will find it difficult to give you any 3-year loan below this rate. This is because you are considered riskier than government. Government is assumed to be risk-free and cannot default. In the worst case scenario, the central bank will print money to pay. But individuals and businesses are likely to default.

There is also the crowding out effect. This means government, the big player, is competing with the private sector for the loans that should be available to SMEs, companies, and individuals.

This is because banks arguably, will prefer to give their monies to government than private sector. This could lead to the collapse of many businesses.

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