Economy edgy on Eurobond flop

Government’s inability to secure its third Eurobond in as many years is expected to pile more pressure on the volatile local currency, which was predicted to rebound with proceeds from the US$1.5 billion facility.

The decision by government to hold on with the Eurobond sales until market conditions improve has rattled the business community with Kenneth Kwamina Thompson, Chief Executive Officer of Dalex Finance, noting particularly that suspension of the Eurobond means more difficult times ahead.

“We cannot tell what will happen to the cedi now. We should brace ourselves because tough times are ahead of us. The Eurobond was a critical plan of government strategy this year. They fought hard to get the IMF to approve it, the World Bank to underwrite it, and parliament to approve it,” he said.

A few months ago, the BoG said it anticipated inflows of US$4billion from both the COCOBOD and Eurobond to provide support for the currency -- but without the Eurobond less is expected, and given the currency’s vulnerability in light of the downturn in the commodities market, “this maybe a significant blow”.

An economist, who didn’t want to be named because he’s not be authorised to talk to the media, explained that the currency may not be substantially supported as the Bank of Ghana projected.

“Already, the currency is in a vulnerable state in light of gold prices down and oil prices below US$50 per barrel, which is hurting our export earnings. So such inflows are needed to augment the supply side of the foreign exchange market. If this bond is eventually cancelled, then the cedi will not be as adequately supported.”

In the absence of the Eurobond, he urged government to get down to the fundamental challenges that the economy is facing.

“Bring down inflation and the deficit, and hope that commodities markets recover from downturn so that export earnings can rise. Then the currency can be supported. Even if the Eurobond had come, the currency was going to gain strength in the last quarter but fall in the first half of next year,” he added.

The local currency this year has suffered several bouts of weakness against its major trading partners, and as at June 30 had lost 26.7 percent of its value to the dollar. The cedi’s fortunes turned around as the central bank increased its dollar sales on the interbank market.

The central bank’s measure was aborted along the way and the volatility resumed, and now the year to date depreciation is about 14 percent.

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.

Low investor confidence

Mr. Thompson attributed the low investor confidence to a combination of global factors including the expected rise in interest rates by the US, and also the perceived risk of giving money to Ghana.

“The fact that our bonds are trading at 11percent should have us ask a few questions. If we passed the last IMF review, why is the market still punishing us? This means investors do not trust us.

“Whether we like it or not, there is a lot of scepticism as to whether the government will be able to meet its fiscal targets and debt obligations, and this scepticism is driven by the fact that we don’t still see any tough talk from the government,” he noted.

No show

With the expected interest rate hike by the United States, slowdown in China -- which is the biggest importer of commodities and biggest consumer of power -- and challenges facing major commodity exporters like Angola, Zambia, Australia and Brazil, investors are moving toward the US.

Last year, the rate for Ghana’s third Eurobond was higher than the rate of 7.875 percent issued on the same figure the year before after it hit 8.125 percent. Government was looking to pay not more than 9.5 percent yield for this year’s bond, but investors were demanding 11.5 percent.

There are currently three Eurobonds outstanding, with maturity profiles of October 2017 for the first bond of US$750 million; August 2023 for the second bond of US$1billion; and January 2026 for another US$1billion.

Proceeds from the 2015 Eurobond were to be used to support the 2015 budget as well as service the country’s growing debt. The Finance Ministry says the country’s total debt stock now stands at GH¢83billion -- of which domestic debt makes up GH¢36.5billion.