BoG re-issues oversubscribed bond

The Bank of Ghana will sell an additional GH¢200million of a five-year bond issued in August that sold at 14.25 percent and was oversubscribed by half.

Auction of the bond, which will set a new benchmark government’s five-year borrowing cost, is set for Thursday.

Proceeds from the issue will be used to partly finance the redemption of a five-year fixed-rate bond maturing this month, and pay for ongoing major road projects, the central bank said.

Investor appetite for the sale is unclear, but ahead of the auction the cedi registered gains as dollar sales increased, according to currency traders.

The government’s three-year borrowing costs rose to 14 percent in October from 13 percent in July as inflation picked up marginally and the cedi slipped to record lows against the United States dollar.

Stable inflation and less macroeconomic uncertainty have helped to lower Treasury yields over the course of this year -- with the cedi broadly firm and steady until a volatile streak in September and October.

Next year, the domestic yield curve will be further extended through the issue of seven and 10-year fixed-rate bonds to pay for infrastructure projects promised in the government’s 2012 budget.

The introduction of such long-term debt instruments is an attempt to rationalise infrastructural spending, finance ministry officials said. The construction and repair of economic infrastructure was a key highlight of the 2012 budget read to Parliament last month.

Most of the projects will be paid for with the initial tranche of a US$3billion loan from the China Development Bank (CDB), Finance Minister Kwabena Duffuor announced.

But there are concerns that such commercial credit lines could add substantially to the public debt, and analysts argue Ghana’s record of returns on public investments will have to improve significantly to justify these new obligations.

Interest on the public debt will cover 11 percent of government spending this year and 10 percent next year, according to the 2012 budget.

The finance ministry says it will lay out a new debt-management strategy this month, which it hopes will alleviate concerns over the rising public debt -- now at 39 percent of GDP.

The main points of the strategy, according to Duffuor, shall include a cap on the public-debt-to-GDP ratio of 50 percent, and a minimum concessional debt ratio of 35 percent in the external loan portfolio. The strategy will limit floating interest-rate loans to one-tenth of the total debt portfolio, and allow for additional borrowing only when “it does not compromise long-term debt sustainability.”

Last month, ratings agency Standard & Poor’s held up its controversial ‘B/B’ rating on Ghana’s creditworthiness, arguing the country’s stable politics and strong output data are offset by continued weak fiscal management.

In July the government raised its budget deficit target to 5.1 percent from 4.1 percent, despite windfalls from oil and higher-than-projected tax collections.

S&P said government’s decision to spend the extra revenue meant it missed an opportunity to further narrow the budget gap and clear remaining fiscal arrears. Bonds sold in the early part of this year were used to settle a substantial part of these debts.