Ghana’s Ministry of Finance plans to recruit more banks to market its domestic bonds as the country seeks to boost demand for its medium- and long-term cedi denominated bonds and lower borrowing costs.
Currently, five financial institutions, known as book runners, arrange and price the country’s medium-term domestic debt. That will be expanded to a new structure known as the bond market specialist group, Deputy Minister of Finance Charles Adu Boahen has revealed in response to an enquiry from Bloomberg. There will also be incentives to lift demand and attract foreign investors.
Book running on behalf of government is a lucrative business which financial institutions seek to be involved in, and therefore political affiliations and sympathies tend to play a part in the selection of who gets the mandate.
When the system was first introduced in 2016, the bookrunners were, Barclays Bank, Stanbic Bank, and Strategic African Securities, the latter being an investment bank.
However, after the change of government at the start of 2017, Strategic African Securities, owned by Togbe Afede who is perceived to have sympathies for the National Democratic Congress which had gone into opposition, was removed and replaced with Databank, whose biggest shareholder is current Finance Minister Ken Ofori-Atta , and IC Securities.
Fidelity Bank was also added to the bookrunners.
Instructively however, all the book runners chosen by both the previous administration and the current one rank among the most capable financial institutions in Ghana with regards to the task of book running.
The government is trying to arrest a decline in demand for Ghana’s debt from foreigners. Bond purchases by non-residents dropped to 48 percent of new issuances and roll-overs of debt securities that they are eligible to buy into – treasury notes and bonds of two years tenor and above -, in 2018, down from 70 percent the previous year, according to Bank of Ghana data.
In January, with the cedi falling against the United States dollar faster than every other currency tracked by Bloomberg (there are 140 of them) thus making foreign investors in cedi denominated debt securities to incur steep foreign exchange translation losses, the share dropped to just 6.3 percent, according to data from the Central Securities Depository Ghana Ltd.
The amount of debt sold through the book-build system fell to 7.9 billion cedis (US$1.5 billion) in 2018 from 15.7 billion cedis the year before.
“The objective is to provide more competition and efficiency,” Boahen said. “The group will be under much stricter rules and obligations.”
The revamp will bring to an end a process started in 2015 to lessen the central bank’s role in auctioning government bonds. Hitherto, all debt securities issuances were done by BoG auction.
However, government decided to introduce the book runner system to enable foreign investors in particular to be engaged before issuances to convince them to buy more debt paper and at lower coupon rates.
This was successful as the average weighted borrowing cost on government cedi debt declined to 16.5 pecent last year from 17.4 percent in 2017, according to the Ministry of Finance.
By Toma Imirhe & Wisdom Jonny-Nuekpe