Ghana’s battered local bond market casts shadow over growth rebound

Ghana’s economy is growing again, two years after a painful economic crisis pushed it into default, but repercussions from a local debt restructuring are casting a shadow over its longer-term recovery.

The restructuring, unprecedented on the African continent, so decimated the local bond market that the government has been forced to lean more heavily on short-term, and more costly, Treasury bills and private placements.

The reliance on comparatively expensive short-term funding worries investors. And raising further debt via private placements, whose pricing is often opaque, adds to concerns over government debt sustainability, six analysts and investors told Reuters.

The government could struggle to lure buyers when it tries to tap local markets next year for longer-term borrowings, the people said.

“There’s little appetite whatsoever to gamble in (government debt) no matter how high or compensatory the rates are,” said Daniel Ankomah, Chief Investment Officer with Accra-based SAS Investment Management.

“It’s a market confidence thing and it’ll take a while alongside the economic recovery. To come back to where we were, we may need a decade or more.”

Ghana’s Dec. 7 elections, which will select the next president, are a further risk. Investors are nervous about the government’s tendency to spend big to lure voters and are casting a wary eye over the leading candidate’s spending promises.

Ghana’s finance ministry said the bond restructuring, though painful, had restored debt sustainability.

“We anticipate re-entering the domestic bond market in 2025, following a two-year hiatus,” it said in written response to Reuters.

It added that the timeline was typical, and was likely to be aided by “an improved macroeconomic environment, specifically inflation”.

The IMF, whose debt sustainability analyses determine the amount of relief needed to get countries back on track, also said the temporary reliance on T-bills was expected, and that ongoing fiscal tightening would cut financing needs.

“These developments are anticipated to enhance confidence in government securities and facilitate a gradual extension of their maturity profile over time,” it said in a statement.

Unprecedented

Governments restructuring debt typically shield homegrown pension funds, banks and individuals from losses, as they rely on them for funding when international markets are too expensive. But Ghana’s mountain of domestic debt made such an approach impossible.

Years of excessive borrowing, blows from the COVID-19 pandemic and rising global food and fuel costs following Russia’s invasion of Ukraine, boosted Ghana’s public debt from 63% of GDP in 2019 to 92.7% by the end of 2022.

In 2022, domestic debt service accounted for 81.7% of the public debt service burden, according to IMF figures.

Restructuring domestic debt in Africa in this fashion is unprecedented, one source close to the debt negotiations told Reuters. But in Ghana’s case, there was no alternative to reach IMF targets, the source said.

The government launched voluntary domestic debt exchanges in 2022, starting with banks. Pension funds, initially exempt, were later included to meet targets. Government-backed loans called cocobills, for cocoa purchases, were also included.

The restructuring, completed in September 2023, should reduce debt-servicing costs by roughly $8 billion from 2023-2026, according to the IMF.

Ghana’s banking sector posted a record loss of 37.7 billion Ghanaian cedi ($2.39 billion) in 2022 as a result, while 31 billion cedis held by pension funds were restructured, impacting the funds’ income and liquidity.

The restructuring also hit individuals’ incomes, drawing protests, including one led by a former chief justice.

“It completely killed confidence,” Thys Louw, emerging markets portfolio manager with Ninety One, said of the restructuring. “Within the spectrum of a local debt restructuring, this is more of a cautionary tale.”

Mr. Louw added that bond liquidity remained extremely limited; another international investor described it as a “Hotel California” trade–one you can enter, but not leave.

Growing again, with pains

Ghana’s economy grew at its fastest clip in five years in the second quarter–nearly 7%–and the central bank slashed interest rates in September due to easing inflation.

The finance ministry and the IMF point to the green shoots of recovery as proof the debt restructuring has set Ghana on a growth path.

But red flags remain.

T-bill yields, which are publicly available, have varied between roughly 20% and 29% this year, and auctions raised 202.87 billion Ghanaian cedi through October, more than 3% above target.

Sources said the government issued a further 6 billion-8 billion cedis of private debt placements, at rates above 29%.

Ghana is also quietly clamping down on private pension fund managers who want to invest in offshore assets due to worries it could worsen pressure on its cedi currency.

“We anticipate that funding and revenue resources will remain limited,” JPMorgan’s Gbolahan S Taiwo wrote in a note, noting a reliance on “expensive T-bill financing given lack of other financing options so far.”

Investors inside Ghana say their inability to easily see the terms of the private placement borrowing, as well as the coming election, have added to their unease about the sustainability of government finances.

One Ghanaian banker told Reuters that the factors that triggered the debt restructuring were still there, with a rigid budget, and limited fiscal space, creating risk.

The country’s next leader is likely to quickly focus on restoring investor confidence and resuscitating domestic bonds.

“This economy needs the local market, especially for the next couple of years,” Ninety One’s Louw said. “I think people will be very, very cautious of lending dollars to Ghana through the eurobond market for some time.”