Ghana’s ultra-long-term bonds: Financing our industrialisation

President Nana Addo Akufo-Addo on Sunday announced in China that the Ministry of Finance and economists are looking at floating an ultra-long-term Bond, as the country prepares to exit its arrangement with the IMF by the end of 2018.

In May this year, Ghana became the first Sub-Saharan African country with a ‘B-‘ rating to successfully price a sovereign bond at over $2bn. In August, investors expressed further confidence in Ghana’s economy during a high-level engagement with the Minister for Finance, Ken Ofori-Atta.

Elaborating on the President’s announcement, Ofori-Atta explained that the favourable environment affords “Ghana a rare opportunity to issue an ultra-long-term Bond of $50 billion that will provide the country with the resources to finance its industrial development, as we embark on our transformational agenda – Ghana Beyond Aid.”

Ghana’s last Eurobond issuance, where it raised US$ 2.0 billion in 10-year and 30-year Eurobonds of $1.0bn each, registered more than $8billion in offers received, showing an oversubscription of more than four times.

China is among a handful of countries to have issued an ultra-long-term Bond. Emerging market economies, in recent years, tend to issue such Bonds to signal market maturity and trustworthiness.

Refinancing interest payments

Ghana spends over $2.4 billion (GHs 11 billion) a year in interest payments. That is about 20 percent of total government revenue before amortisation. Average interest rate on the country’s domestic borrowing is in the high teens.

That 30% of Ghana’s total debt stock is in treasury bills and other short-term instruments of less than 1 year, means there is a constant need to roll it over on maturity.

To avoid running the risk of auction failures, Ghana is forced to take money at whatever rates investors demand. This is a problem that can be eliminated by extending maturities and reducing Ghana’s short-term borrowing.

“Our ability to refinance these interest payments and reduce the cost of our borrowing by even 10 percent will translate into about GHs1.1 billion in savings annually… more than enough to finance our 1D1F programme.

“Ghana will benefit substantially from an ultra-long-term Bond. This will help stabilise our domestic currency and push GDP growth to 9-10% over the medium term. Essentially, our current debt structure and financing requires a structured approach to lower its debt service requirement, and ensure debt sustainability while making available long-term funding for infrastructure and industrialisation”, Ofori-Atta said.

In other words, the current government will use part of the money to pay back the loans with exceptionally high interest rates contracted by the previous NDC government, and use the rest for development projects that will lead to more income for the country.

Ghana Beyond Aid is an ambitious transformational project that requires a substantial financial arrangement to decisively quicken the country’s pace of economic development in the medium term.

“Government intends to build regional and intercity railways, upgrade and enhance its road network on a massive scale, invest in large-scale housing and enhance mortgage accessibility, and promote the regionalisation of financial services, health and pharmaceutical industries, among others”, Ofori-Atta added.

In the meantime, President Nana Akufo-Addo insists that his government is “determined never to return into the focus of an IMF Programme.”