Bondholders are no longer willing to cut Ghana any slack as the era of cheap money draws to a close.
Investors believe that re-financing debt in the Eurobond market won’t be an option when the Federal Reserve raises rates and budget targets remain elusive, thus the West African nation’s dollar bonds have dropped 10% in ten days, pushing it deeper into crisis territory.
The premium paid on Ghana’s sovereign dollar debt increased to an average of 1,105 basis points on Wednesday, up from 683 basis points in September.
According to a Bloomberg index, its $27 billion in foreign debt has suffered the worst start to the year among emerging economies, extending last year’s 14 percent loss.
Investors are concerned that Ghana, the region’s second-largest economy, may be unable to maintain current debt levels if borrowing costs rise, thus shutting it out of international markets. According to data published by Bloomberg, government debt reached 81.5 percent of GDP at the end of last year, up from 31.4 percent a decade ago.
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Following this month’s selloff, Ghana has clearly established itself as one of the EM’s distressed debt countries.
Kevin Daly, investment director at Aberdeen Standard Investments in London, stated, “The market has woken up to the fact that this is a country with a lot of outstanding bonds.” “A lot of people started the year with overweight postures, and a lot of them have started to give up.”
The yield on the West African country’s $750 million bonds due in March 2027 slid 10 cents to 79.4 cents on the dollar on Thursday, bringing the yield to nearly 14%. A Bloomberg index tracking government debt showed that 13 of 14 Ghanaian dollar bonds are trading with an extra premium of at least 1,000 basis points, a level deemed distressed.
“I don’t expect them to default in 2022 since they have sufficient foreign-exchange reserves,” said Joe Delvaux, a portfolio manager at Amundi in London. “However, in the medium to longer term, it becomes an issue because Ghana has lost access to the Eurobond market for debt rollover,” he added. “They have too much debt for their size of economy, and investors have lost faith in the government’s commitment to cut expenditure and implement required reforms.”
The government’s failure to approve a new fee on electronic money transfers through parliament in November raised investor concerns about the government’s political capital to pass revenue-raising measures or cut spending to decrease borrowing demands.
The administration will struggle to fulfill this year’s budget deficit target of 7.4 percent, down from 12.1 percent last year, due to opposition to the tax reform and plans to eliminate a subsidy on pharmaceutical and vehicle imports.
“At this time, there is no appetite for a fresh Ghana issue, and there probably won’t be until the government has more significantly controlled its public finances,” said Carlos de Sousa, who oversees a $3.8 billion developing-nation bond fund at Vontobel Asset Management in Zurich.