Just two and a half years after Ghana rejected advice from the International Monetary Fund (IMF) to extend its Extended Credit Facility programme – begun in 2015 and ended in 2019 – the country’s fiscal difficulties are making it to consider asking the Fund for new financial support as its debt continues to rise and an array of international bond maturities loom on the horizon.
The debt, which is presently a little above GHc335 billion, continues to rise, with the inordinate fiscal deficits imposed by the effects of COVID 19 offering little chance of reversing this trajectory.
Consequently, technocrats within the Ministry of Finance have started to persuade their political appointee bosses to at least consider turning to the IMF as a cheaper source of financing and as a possible advocate for cheaper coupon rates on the country’s bond issuances on international capital markets.
So far the political appointees who head Ghana’s economic management team are publicly having none of this idea but privately some of them are reportedly beginning to take the suggestion seriously. However even though they may see the financial pragmatism in securing financial breathing space from the Fund they fret that it would come with demand management economic policies that are diametrically opposed to the expansionary supply side policies that the incumbent government believes in and which indeed had served it so well before COVID 19 came and threw a monkey wrench in the works.
The fiscal pressures created by the economic impacts of COVID 19 have accelerated Ghana’s public debt problems, and the subsequent downgrade of the country’s sovereign debt position is making it harder to finance the public debt.
Although support from the IMF in the form of a Rapid Response Facility last year and increased SDR allocation this year have softened the shock created by COVID 19, the sheer size of the debt and consequent cost of servicing it – which is taking half of government’s tax revenues this year – are making the requisite fiscal consolidation all the more difficult to execute.
According to a Bloomberg survey, the country may have to pay a higher premium if it returns to the international capital market next year to issue a Eurobond.
Indeed, government now seems set to abandon the issuance of US$1.5 billion in green bonds which it had planned to do during the second half of this year, primarily because of the reticence being shown by potential international institutional investors during informal (non-binding) discussions with government economic management chieftains. Apparently the investors who have shown interest in a second international capital markets bond issuance by Ghana in 2021 are tying their subscription to coupon rates which the Government of Ghana considers too high.
Last week, Ghana’s credit-risk premium soared to the highest since the start of the Covid-19 pandemic ahead of next month’s budget.
“Do they still have access to the Eurobond market at these levels? Could they issue one at a reasonable price?.” asks Neville Mandimika, an Economist and Fixed Income Strategist at FirstRand Bank in Johannesburg.
“The answer seems to be no.”
Ghana has historically relied on funding from the Eurobond market to fund expenditure.
But limited access to international loans could force the government to supply more debt locally, which would be detrimental to cedi yields as banks and institutions already own about 80% of the financial instrument.
Ghana’s dollar bonds are the worst performers this month in a Bloomberg index tracking emerging-market hard-currency debt, with a decline of 5.8 percent. The 2025 yield jumped 153 basis points on Monday, 18th October, 2021, the most in a day on record since the debt began to trade in April 2021.
It climbed a ninth consecutive day on 20th October, 2021 by 4.0 basis points to 11.28 percent, the highest on record.
“At this point they need to present a credible plan B on how they fund the budget in the absence of Eurobond issuance,” says Mr. Mandimika.
“In a worst-case scenario where debt is growing amid a global risk-off mood, Ghana may have to head back to the IMF.”
It is instructive that this scenario is already – albeit reluctantly – being considered in Accra as well.
The Governor of the Bank of Ghana, Dr. Ernest Addison, speaking at the Ghana Economic Forum has called for a fiscal policy in next year’s budget that will create a more credible path towards fiscal or financial sustainability.
According to him, this is important for the country’s quest to accelerate its economy rapidly but remain financially sound.
“The 2022 budget should be used to reset fiscal policy to create a more credible path towards medium term fiscal sustainability. This would be an important building block to establish and entrench credibility, a key component to stability”.
Interestingly, several past administrations in Ghana have hidden behind the IMF to implement necessary but unpopular fiscal initiatives such as tax hikes and subsidy removal. Recent introduction of new taxes and levies in the 2021 budget have been met with widespread protests among the populace including demonstrations on the streets of Accra.
Up till now, premium investors have demanded to hold the country’s debt rather than US Treasuries, which has climbed 144 basis points in October 1st, 2021 to 910 basis points on Tuesday, 19th October, 2021, the highest since May 2020.
But an impending rise in both coupon rates and secondary market yields on US treasuries is in the offing as the US Federal Reserve Bank has announced its intention to taper its bond buying programme as a precursor to ending its monetary easing policy introduced last year to prop up economic activity in the face of the slump in economic activity imposed by COVID 19 and its requisite socio-economic restrictions introduced to curb the spread of infections.
As economic activity and consequent economic growth increases in the US and other countries in the western hemisphere, inflation is also on the rise and monetary tightening is inevitable sooner or later, the only question still unanswered being the timing of the impending interest rate hikes.
This will be troublesome for Ghana which will have to imminently begin refinancing its foreign debt, consisting primarily of the Eurobond issuances it has engaged in annually since 2013 and for which maturities will begin falling due in September 2022. Around the middle of the previous decade the coupon rates demanded by investors on Ghana’s sovereign dollar denominated bond issuances rose to a peak of 10.25 percent, the highest on any issuance by a sub Saharan country. While part of such debt has since been refinanced through bond buy backs using the proceeds of cheaper issuances over the past four years, there are still substantial amounts that will fall due during this decade and hopes of refinancing them with relatively cheap fresh bond issuances made possible by the monetary easing dispensation are now receding.
The country’s revenue fell short of target by 12 percent to GHc34.3 billion (US$5.66 billion) in the first seven months of the year and may continue to do so, putting pressure on its economic growth outlook.
Economists from Redd Intelligence, Renaissance Capital and Capital Economics who spoke to Bloomberg are already forecasting annual economic growth to stay well below the target of 5.1 percent in 2021.
Indeed, after President Nana Akufo-Addo had announced a second quarter growth rate of 8.9 percent to the international investment community, the Ghana Statistical Service came up with a much more sedate growth rate of 3.9 percent. The huge discrepancy has been swept under the carpet but this has left a feeling of disappointment. After all it was the BoG’s promising early data in the form of a year on year 33.1 percent rise in its Composite Index of Economic Activity for May that had raised expectations of sharp economic growth in the first place, which had left the President’s hugely exaggerated growth statistic to go unchallenged when he had made it.
However even a 3.9 percent growth rate for the second quarter, coming on the back of the first quarter’s 3.1 percent is impressive under the circumstances imposed by COVID 19; sub Saharan Africa as a whole is expected to grow by a significantly slower 3 percent.
On the downside though, the 2nd quarter performance lowers the expectations that government will achieve its full year growth target of 5.1 percent (revised upwards marginally from 5.0 percent at the mid-year budget review). Indeed the BoG’s CIEA, after peaking at 39.4 percent growth, has been declining since mid-year, to 20.2 percent for June and 20.0 percent for July, creating the possibility the economic growth rate may not accelerate further – or even decline.
Slower-than-anticipated growth will also make it harder for Ghana to fund its budget deficit, which is expected to return within the legislated threshold of 5% of Gross Domestic Product by 2024, after breaching it last year.
Analysts have also expressed worry about the widening credit spreads that raise questions about the country’s debt trajectory.
By the end of July this year Ghana’s public debt stood at GHc335.9 billion, up from GHc263.4 million a year earlier and GHc291.6 million at the start of this year. This is equivalent to US$57.9 billion. It also amounts to 76.4 percent of Gross Domestic Product, up from 68.7 percent a year earlier and 76.0 percent at the turn of the year.
This again confirms the unsustainability of Ghana’s public debt trajectory, even without COVID 19 having added considerably to the problem.
On the upside though the debt owed on the issuance of Financial Sector Resolution Bonds has declined to below GHc15 billion for the first time since the 4th quarter of 2020, standing at GHc14.9 billion as at July this year.
The strategy of the incumbent government in this regard is basically the same as its predecessors; refinance maturities through new borrowing while taking enough to finance the inevitable yearly budget deficit. There is no end game in place for reducing the debt – and debt servicing requirements which now take up half of the state’s annual public expenditure. The closest to that is the ploy used in the road shows government embarks on when seeking subscribers to new bond issuances: that new oilfields will be discovered and developed which will ultimately generate the revenues needed to pay down the state’s indebtedness.
International bond investors have seen through this for years; having noticed that Ghana’s debt is expanding even faster than its oil revenues. So far however bond investors have not been overly concerned knowing that Ghana is a responsible debtor and that it generates more than enough to pay the interest and other fees which means it can go on refinancing its debts for a long time to come without stress to the investors. But this means demanding an increasing risk premium and Ghana’s government is becoming increasingly reluctant to keep pace with these demands
International credit rating agency, Moody’s has been warning that Ghana will find it inordinately expensive to borrow to run its economy due to a decline in revenue and an increase in interest costs.
In its latest assessment of the Ghanaian economy, Moody’s which currently ranks the country B3 with a negative outlook, explains that Ghana has high exposure to external financing.
“The negative outlook reflects the rising risks that the pandemic poses to Ghana’s funding and debt servicing due to its exposure to shocks from a high dependence on external financing,” says Kelvin Dalrymple, Vice President – Senior Credit Officer, at Moody’s.
According to Moody’s, the challenge now for Ghana is to implement an austere budget by limiting spending or find cheaper loans to finance the deficit left by its reduction in earnings.
“That said, our outlook could turn stable if the government limits the potential increase in its funding needs or confidently show it will be able to get sufficient funding at moderate costs, when needed,” Mr Dalrymple explains.
Again, he points out that the Ghanaian economy, is more diversified than Nigeria’s oil-dependent one and could rebound faster if it reduced its exposure to foreign borrowing.
“Debt affordability remains Ghana’s main credit constraint and has continued to deteriorate since 2020, driven by both the declining revenue share and a higher interest bill, reflecting greater recourse to borrowing to fund spending,” Moody’s notes.
The rating agency adds that it will upgrade the country’s outlook to stable if efforts are made by government to ease financing pressures in the economy either through increasing revenue or finding cheaper sources of debt.
“We would likely change the outlook to stable if we conclude that financing pressures were abating, either through increasing evidence that the government is able to limit the increase in its funding needs or confidence that it will be able to secure sufficient funding at moderate costs”.
It adds: “a stabilisation and reduction in Ghana’s debt-service ratio would ease refinancing risks and support an improvement in its debt-affordability metrics. The implementation of measures that would arrest the rise in direct and contingent debt and provide confidence that the debt burden will fall would also support a return to a stable outlook. Ultimately, as current pressures dissipate, the improving trends evident prior to the coronavirus shock would likely emerge.
Government is looking to expand kits revenues by roping the vast informal sector into the income tax net but this will take time and government will inevitably balance its needs for informal sector economic actors’ taxes against the need for their votes at the next general election in in 2024.
This makes the possibility of cheaper funding of the public debt all the more attractive and the cheapest source available is the IMF.
To be sure, there are clear potential benefits. Firstly, IMF financing is much cheaper than commercial financing through international bond issuances and properly negotiated, could offer longer tenors too. Secondly, and just as importantly, Ghana in an IMF programme would be more attractive to international bond investors which would translate into more willingness to invest in new bond issuances and lower coupon rates on such new issuances too. Both of these factors could prove crucial as Ghana enters a most precarious era with regards to its economic management.
To be sure the IMF would be only too happy to take Ghana into its fold through a new medium term programme similar to the Extended Credit Facility that the country went through from 2015 to 2019.
But conversely the incumbent government would be loath to return to an IMF programme that emphasizes demand management over supply side economics and that thus contradicts its core beliefs, more so when its expansionary policies had worked so well until COVID 19 had unavoidably thrown Ghana’s economic performance askew.
This creates a veritable dilemma for government.