The CSJ questions the “ success ” of the post-pandemic Eurobond
On March 30, 2021, the Government of Ghana announced the successful issuance of a $ 3.025 billion Eurobond to international investors in four different tranches, which has been oversubscribed. The tranches include 4-year, 7-year, 12-year and 20-year bonds at coupon rates of 0%, 7.75%, 8.625% and 8.875%.
The four-year US $ 525 million zero coupon bond, the first from a sub-Saharan African country in 2021, is receiving the greatest hits from analysts and observers.
Ghana’s success in securing the desired amount in the midst of a pandemic and a significantly high level of debt to GDP (76%, December 2020) will likely boost other African issuers, notably Kenya and Angola, since Ghana’s issuance has served as a barometer to investor appetite for African sovereign bonds, a series of African states seeking debt relief or facing defaults
In addition, the strong demand for auctions in Ghana despite its current status of high risk of debt distress (Ghana Debt Sustainability Analysis by IMF – World Bank – 2020) means the continued pursuit of higher returns by foreign investors. in the generally low overall interest. environmental tariffs. Ghana’s continued access to the international capital market will delight not only managers of the Ghanaian economy, but other African countries.
The question is whether this oversubscription of the Ghana 2021 Eurobond is the vote of investor confidence in the direction and medium to long term sustainability of the Ghanaian economy as suggested by the Ministry of Finance? Rather, our review of the recently completed Eurobond issue paints a different picture: we observe that Ghana took advantage of the first-mover advantage and provided too soft a deal for yield-hungry investors.
Source: https://www.bloomberg.com/markets/rates-bonds/government-bonds, accessed March 31, 2021.
Ghana had the right timing entering the market during a period of high liquidity. When fund managers and other investors in developed economies struggle with negative to very low returns in advanced markets. More importantly, the yields offered on Ghana bonds were too tempting to ignore.
Despite these strategic victories, the CSJ notes the following challenges with each of the bonds issued.
4-year zero coupon bond: while Ghana will not make any payment under this bond until April 7, 2025; thus, offering a short-term respite of cash, the bond was not cheap.
The bond was sold at a discount of 22%, implying an embedded cost of US $ 115.5 million or a coupon rate of approximately 5.5% per annum. Unlike the 6.309% per annum yield that holders of this bond make, if held to maturity, a similar investment in a 5-year US Treasury bond will have yielded 0.94% per annum and 0. 39% per annum in British public debt. For Germany and Japan, the return will have been negative.
7-year bond: 7.75% coupon: this bond was issued at par, producing a yield equal to the coupon. The bond is considered very expensive and costly compared to similar instruments in the market. The UST Benchmark Bond has a coupon of 1.25% per annum and a yield of 1.367%, while a UK 10-year bond has a yield of 0.84% per annum. In February 2020, Ghana has issued a 6-year bond of $ 1.25 billion at 6.375% and a Eurobond of $ 1.00 billion at 14 years at 7.875%, so that the issuance of a half-term bond from last year at the current rate makes this bond relatively expensive. At the time of the 2021 bond issue, the Ghana bond maturing in 2030 was trading at a yield of less than 7.00%.
Tranches 3 and 4 were issued at a discount, with coupons approaching 9% per annum. These bonds are well above the rates available in developed markets. They also do not compare favorably to the Ghana show in February 2020 and the post-covid-19 show from Côte d’Ivoire. The 8.750% yield on the 12-year 3rd tranche bond is the same as the 41-year bond the country issued last year, and this defies the lower risk canon with relatively tenor trades. weaker.
In February 2021, Côte d’Ivoire raised 850 million euros, or 1.03 billion US dollars in two tranches of 600 million euros due 2032 and 250 million euros due 2048 at yields of 4.30% per year and 5.75% per year, respectively. Ivory Coast issue follows a € 1 billion bond issue in November 2020 at a yield of 5% per annum
A major driver of the acceleration of Ghana’s debt burden has been the rapid increase in interest payments in recent years. The main driver of the increase in interest payments is the domestic debt component of total debt.
According to the government, the proceeds from the $ 525 million zero coupon bond over four years would be used to pay off expensive existing domestic debt (domestic bonds attract an average interest rate of around 19%) and even create a net saving of 184.2 dollars. millions for the country.
While this may seem like a smart move, the country’s public debt managers need to recognize that, overall, Ghana’s Eurobond issues in 2021 represent relatively expensive bond additions to our existing public debt. .
The human cost of increasing public debt cannot be overstated. The high cost of servicing the debt is draining our limited resources. It cuts allocations to essential social services, including education, health and support for the most vulnerable in our society. Debt juggling is only a short-term solution to dealing with the increasing public debt burden.
The CSJ therefore suggests that the government should exercise caution when exploiting the international private debt markets. When doing so, the country’s public debt managers need to develop a strategy to reduce the high borrowing costs facing the country. More importantly, long-term solutions are needed to reduce the level of public debt.
The comprehensive long-term strategy must include increased efforts to strengthen domestic resource mobilization; reform and strengthen governance with an emphasis on increasing transparency and accountability in decisions about borrowing and the use of public debt; set up and apply effective management rules for the parasterne sector to control the loans of public enterprises.