Economic Update

Published 30 Aug 2013

In late July Ghana held an international bond sale, raising dollar-denominated funds for the second time since 2007, when it became the first country in sub-Saharan Africa to do so. The yield the second time around was higher than some recent issues for peer countries in Africa, but the sale was oversubscribed and Ghanaian officials consider that an encouraging signal. More bond sales are expected in the near future, chiefly to pay for infrastructure projects and help further develop the size and scope of the local bond market.

Ghana’s goal was to raise $1bn, and the sale officially totalled $750m in 10-year notes with a yield of 7.875%. The finance ministry said an additional $250m in bonds would be swapped for some of the outstanding debt issued in 2007. The notes will be tradable on the Ghana Stock Exchange and on the Irish Stock Exchange, according to the government. That makes it the second example of sub-Saharan sovereign debt tradable on a local bourse, with the first coming in South Africa. Proceeds from the sale were earmarked for capital expenditures in the 2013 budget, debt refinancing and self-financing infrastructure projects such as ports and power plants.

Ghana’s $750m sale in 2007 (at a yield of 8.5%) was not just a first for the region but the start of a trend. Since then 10 other sub-Saharan countries had successfully sold bonds in dollars. This time, the issuance came at the tail end of a rush of emerging market offerings since July 10. On that day US Federal Reserve chairman Ben Bernanke triggered a rush to market by ending speculation that the US would begin scaling back its quantitative easing programme. In the 15 days following, emerging countries issued at least $13bn in bonds internationally, according to Bloomberg data.

At 7.875%, the yield on Ghana’s latest bond sale is high relative to recent activity by its peers. Nigeria and Rwanda both paid less in 2013 on 10-year bonds. Nigeria’s sold on July 2 with a yield of 6.63%, and Rwanda, in its first international sale, raised $400m in April at 6.875%, the low end of the projected yield range. While a lower cost can be expected for Nigeria given its higher credit rating, Ghana and Rwanda both are rated five notches below investment grade at “B”, according to Standard & Poor’s. Nigeria is two grades higher at “BB-”.

However, market conditions have changed considerably since Rwanda’s sale. The appetites of investors worldwide for emerging-market bonds may have been satiated by the July rush, and concerns may linger about quantitative easing in the future. Some Ghana-specific reasons that may explain the higher yield paid include the lingering legal challenge to the result of the December 2012 election, and increased deficit spending in the run-up to the vote.

Regardless of what the yield on this debt sale indicates about the current global sentiment about Ghana, bonds issuances are likely to continue. “The way forward for Ghana is to continue to access the bond market to support capital projects,” Finance Minister Seth Terkper told media on August 12. Terkper said a second international bond sale in 2013 would raise $200-250m to pay for more electricity projects.

There are also plans to issue local currency debt, including a GHS200m ($95.83m), seven-year bond. The duration is a new one for the country and will help to build a yield curve, which along with capital projects is a major goal for the government. The debt will likely offer a yield at or around 20%. With the cost of borrowing well above 20% for most in the private sector, the hope is that an improved yield curve will lower the cost of finance, and also reduce pressure on banks as a source of capital. Sovereign sales of three-year and five-year debt are also expected in 2013.

The government in total in 2012 sold GHS26.5bn ($12.7bn) in debt, according to a recent Bank of Ghana update, and total public debt amounted to GHS39.1bn ($18.73bn) as of the end of the year, or 43.9% of GDP. Foreign investors hold more than 90% of the three- and five-year bonds, the central bank disclosed.