Feature: Ghana’s Eurobond : An Incomplex Breakdown & Analysis.

When a company, a syndicate, a government, or any entity needs to borrow money to, let’s say, keep the business running, to embark on new projects, to pay back old loans, for aggressive expansion, or for whatever reason, they may issue out what is called “bonds” to interested parties. Quite simply, a Bond successfully issued is a Loan accepted. The borrower is the issuer of the bond and the bond will contain the terms of the loan e.g. the interest rate (or coupon rate), how the interest payments (or coupons) will be made, the time at which the full amount has to be paid to the investor (maturity date), etc.

That is a bond.

What is a Eurobond?

The EURObond only means the issuer isn’t in the same country or trading in the local currency of the investor/lender. A Eurobond doesn’t have to be about Europe or the Euro. It just points to the international aspect of the bond and the involvement of foreign currency.

As Ghanaians, the Eurobond means the loan will be in a foreign currency, specifically, dollars. This should explain the government’s recent confidence that the arrest of the fall of the Ghana Cedi against the US Dollar was on its way. The Eurobond they were issuing meant dollars was coming into the system, thereby reducing the scarcity and the accompanying demand for the dollar.

The Eurobond, also known as external bonds, is issued in one country and sold in a different one. Bonds are grouped by the currency in which they are denominated. For example, bonds issued in US dollars is known as Eurodollars.

How Eurobonds Work

Anyone in need of foreign-denominated borrowings for a specified time can offer Eurobonds at fixed interest rates. Private organizations, international syndicates, and the government can offer them. The buyers or investors of these Eurobonds are generally large companies, banks or financial institutions. The interest is calculated annually and the principal amounts paid at the maturity date.

Ghana offered her first Eurobond in 2007 to the tune of $750 million, asking investors to lend that amount with the promise of paying it back in 10 years with interest. Bonds were issued through the Bank of Ghana, while the government received the cash amount in the form of a loan.

The general popularity of Eurobonds is because of its ability to be a financing tool. They offer a high degree of flexibility. For governments, it’s usually an immediate, long-term finance option. An investor considers several factors when looking at which country to target for Eurobonds, e.g. favourable interest rates, a stable market, local regulations, or the presence of likely investors. These can all play a role in the decision.

Ghana’s Eurobonds, present and past

I’m sure you’ve already read or heard that Ghana issued a $3 billion Eurobond. It just means we accepted a $3billion loan from outside. The Finance Minister, Ken Ofori-Atta, indicated in the 2019 Budget Statement that the government had the intention to do this. What is really worthy of mention is that when we asked for $3 billion, we got offered an impressive $21 billion and we still only accepted $3 billion. The extra offers made room for lower rates and better terms of engagement, as will any bargaining scenario when the demand for what you offer is high.

Also note that we issued not one but three bonds with three different maturity periods (payback times). So we’re going to pay back the $3billion in installments, with each installment having it’s own terms and conditions. The maturity period for the first installment payment is 7years at a rate of 7.875%, the second is 12years at a rate of 8.125%, and the third is 31years at a rate of 8.950% which will be repaid in the year 2050. Ghana has never issued a 31year bond. We have issued Eurobonds seven times in our past; 2007/$750million/10year, 2012/$1billion/12-year, 2014/$1billion/12-year, 2015/$1billion/15-year, 2016/$750 million/5-year, 2018/$1billion/10-year, and again last year 2018/$1billion/30-year.

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The benefits of all of these depend on how the government invests the proceeds of these bonds. Eurobonds are issued in dollars. They are therefore exposed to foreign exchange risks, which can dramatically and quickly affect returns. For example, if the cedi depreciates against the dollar, the government will have to collect more taxes to translate into dollars or even borrow some more to pay our foreign creditors. Mismanagement and misallocation of funds will only harm the economy even more.

And The IMF Cautions Us.

Though we’ve broken up with the IMF, they seem to still slide in our DM’s with a message or two every now and then. A bond issued is a loan. The IMF cautions that, with all these monies coming in, we have to pay back sometime so if we don’t invest it well to generate growth and repayment capacity, then there will be a debt crisis on our hands later on. I have always stated that mismanagement is the biggest issue our nation ever faces.

Of late the World watches Ghana. The macroeconomic data validated by the international community now points to a promising future. While the global bond markets secretly scrutinised Ghana, we left the IMF and planned for $3billion in Eurobonds but got offered seven times that ($21million). That’s like leaving your spouse and suddenly getting 21 messages from other suitors the next day after announcing the breakup, but you expected about just 3 IM’s. That means you’re hot! Ghana is looking very hot right now and the IMF is saying we face a debt vulnerability risk if the proceeds of these bonds are not managed properly.

The IMF is absolutely right.

Nonetheless, this increased scrutiny and attention by the international community and foreign investors have the power to strengthen macroeconomic discipline and move transparency and structural reforms forward. Because the people in whose praise we are now basking are watching us keenly. If we intend to court them further then Ghana must manage her affairs properly. We must do away with corruption as much as we can, honour all finance commitments and meet all loan deadlines. Bad economic policies will come at a price if investors do not feel comfortable with our long-term macroeconomic strategies. If foreign investors and the international community are not happy, they will look away to find greener pastures.

The IMF is 100% right with their caution.

The Benefits of the Eurobond

Mr Ken Ofori-Atta, the Minister for Finance, last year revealed to lawmakers in parliament that GH¢30 billion is needed to bridge the infrastructure gap. This is one of the many cracks in our economic structure that needs patching up and that will require big money.

Ghana has previous loans to clear that could send a bad message if left outstanding.

The economic ambition of the nation is high. There are bold initiatives that need financing to be actualised.

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Borrowing from overseas is good for the economy as opposed to borrowing domestically. If the government borrows domestically, the competition for funds will drive up the interest rate. Because issued Eurobonds brings in the money from elsewhere, the extra supply of cash into the economy has the potential to reduce lending rates by the banks and to facilitate productive sectors of the economy.

Recently Ghana split from the IMF. Previously we took money from the IMF, The World Bank, International Aid, or concessional loans from friendly countries. Many times the conditions attached to these loans limit us from operating independently. On the other hand, Eurobonds tend to come with few conditions. This allows the government the freedom to utilise the funds as they see best.

Eurobond terms are generally favourable. So the government can rob the proverbial Peter to pay Paul when Paul’s terms are worse than Peter’s. Eurobonds with low interest rates and longer maturity periods can pay for old loans that had higher interest rates and/or shorter maturity periods. This can increase the country’s credit rating.

While global interest rates are expected to rise, getting a long-term low interest loan can be a good thing.

And as stated earlier, the inflow of foreign currency can stabilise the cedi by reducing the scarcity of foreign currency in the markets.

Conclusion

Corporate entities like Guaranty Trust Bank in Nigeria and Vodafone Ghana have successfully issued Eurobonds. It’s nothing new. Just last week, Ecobank Transnational Incorporated, the parent company of the Ecobank Group, just announced its first ever successfully issued Eurobond of $450 million. It’s nothing too confusing. It looks like a good alternative if managed properly. While some investors find it risky to invest in Africa, take solace in the fact that our recent Eurobond was seven times oversubscribed. Our demand was met seven times over. But proper management is key to the success of these Eurobond endeavours, as with any finance situation.

The government first announced its intention to raise $3 billion from the international capital markets in the 2019 Budget Statement. $1 billion would be used to refinance 2023, 2026 and 2030 Eurobonds, and the remaining $2 billion of this is going to take care of this year’s budget needs.

Last year, the United Nations Special Rapporteur on Extreme Poverty and Human Rights wrote on the Infrastructure for Poverty Eradication Programme (IPEP), for which GH¢665.2 million has been allocated to fund. There is GH¢106.87 million allocated to support economic activities in Zongo communities. And another GH¢300 million for the Planting for Food and Jobs Programme.

We look out for the proper utilisation of these funds for long-term economic value, and also economic policies that strengthen our repayment capacities.

Reach out to me on social media and let’s discuss some more, if you will. Let’s keep the conversation going!