By Kofi Ahovi
The government is considering sourcing for capital on the international market to finance the country’s fiscal deficits.
It is however unclear how much the government would seek on the international market as it is yet to agree on the modalities, but sources at the Ministry of Finance and Economic Planning (MOFEP) say it could be around US$700 million.
If government goes ahead with this it would be the second time in three years that Ghana would seek financing through a sovereign bond issue on the international capital market.
Ghana went to the international market in September 2007, for the first time, to raise funds through a sovereign bond issue. The US$750 million bond issue was oversubscribed by over 400%, amounting to US$3.7 billion.
About 40% of the bond was placed with US investors, 36% with UK investors, with the remaining going to the rest of Europe. Altogether, 158 interested parties bought into the 10-year dollar bonds that yielded 8.5% at par.
Euro bond coupon rates are set at an interest spread above the London Inter-bank Offered Rate, the spread depending on the perceived sovereign risk of the issuing country.
Government’s consideration of a new Eurobond issue is however in contrast to its earlier inclination not to contract new loans on commercial terms, but rather restrict itself to concessionary borrowing from multilateral institutions such as the World Bank and the International Monetary Fund, and bilateral development partners.
It is believed that government is being persuaded to rethink this strategy by the prospect of substantial revenue from oil and gas when commercial production begins around the end of this year, which could be used to service and ultimately amortize another bond issue. There are increasing worries within government that the public sector’s financial constraints are creating disaffection within the electorate who had expected a more expansionary approach to economic management.
In recent months, the yield on Ghana’s Eurobond has fallen to below 7% as a result of strong demand for them by international investors, illuminating the increased confidence they have in Ghana’s repayment capabilities and this indicates that a second bond issue, if opted for, would likely replicate the success of the first one.
As a result of the country’s success in launching the 2007 bonds, Ghana was awarded two awards – the 2007 Emerging Market Bond of the Year and the Eastern Europe, Middle East and Africa (EEMEA) Bond of the Year by the International Finance Review at its 13th Gala Dinner in London, United Kingdom.
It was the then government’s intention to use the proceeds from the Eurobond to finance projects that would yield profits to enable the country pay back confortably. The projects planned included the construction of major highways on which tolls would be collected towards repayment of the facility.
However, largely because of external shocks created by a sharp spike in international crude oil prices and rising world food prices, and to a lesser extent because of a large number of capital projects that were not properly budgeted for, a substantial portion of the proceeds from the bond issue were diverted into balance of payment support.
The Minister of Finance, Dr. Kwabena Duffuor, announced government’s decision to create a special fund in which it will save to pay interest on the Eurobond and amortize early the $750 million principal which is due for repayment in 2017, but experts believe the country’s finances could seriously be affected by the early repayment of the non-concessional commercial loan.
Government plans to finance the deficit from both foreign and domestic sources. Foreign financing is projected at GH¢905.3 million, equivalent to 4.2% of GDP. As a result of the projected increase in the overall budget deficit, domestic financing of the budget is expected to be higher than the projection in the 2009 budget.
Consequently, the net domestic financing of the budget for the whole year is projected at GH¢1,304.4 million, 26.3% higher than the 2009 budget estimate of GH¢1,032.8 million.
On a broad coverage basis, data on the 2009 budget indicate that government fiscal operations resulted in a deficit of GH¢2.1 billion equivalent to 9.9% of Gross Domestic Product (GDP) compared with GH¢2.6 billion or 14.5% of GDP for the same period in 2008.
For the first three months of this year, government fiscal operations resulted in a narrow deficit of GH¢1.1 billion or 4.2% of GDP compared with GH¢100 million equivalent to 0.6% of GDP for the first quarter of 2009. The fast paced growth of expenditures observed in the first quarter of 2010 was driven mainly by the clearance of road and non-road arrears and part settlement of Tema Oil Refinery’s (TOR) indebtedness to Ghana Commercial Bank (GCB) all totaling some GH¢700 million 2.8% of GDP.
Expenditure management, though, has been very rigorous, although payment of high domestic interest, judgment debts, as well as, the projected shortfalls in revenues and grants, are expected to result in an overall end-year budget deficit of GH¢2,213.3 million, equivalent to 10.2% of GDP by the end of this year.
The government is considering sourcing for capital on the international market to finance the country’s fiscal deficits.
It is however unclear how much the government would seek on the international market as it is yet to agree on the modalities, but sources at the Ministry of Finance and Economic Planning (MOFEP) say it could be around US$700 million.
If government goes ahead with this it would be the second time in three years that Ghana would seek financing through a sovereign bond issue on the international capital market.
Ghana went to the international market in September 2007, for the first time, to raise funds through a sovereign bond issue. The US$750 million bond issue was oversubscribed by over 400%, amounting to US$3.7 billion.
About 40% of the bond was placed with US investors, 36% with UK investors, with the remaining going to the rest of Europe. Altogether, 158 interested parties bought into the 10-year dollar bonds that yielded 8.5% at par.
Euro bond coupon rates are set at an interest spread above the London Inter-bank Offered Rate, the spread depending on the perceived sovereign risk of the issuing country.
Government’s consideration of a new Eurobond issue is however in contrast to its earlier inclination not to contract new loans on commercial terms, but rather restrict itself to concessionary borrowing from multilateral institutions such as the World Bank and the International Monetary Fund, and bilateral development partners.
It is believed that government is being persuaded to rethink this strategy by the prospect of substantial revenue from oil and gas when commercial production begins around the end of this year, which could be used to service and ultimately amortize another bond issue. There are increasing worries within government that the public sector’s financial constraints are creating disaffection within the electorate who had expected a more expansionary approach to economic management.
In recent months, the yield on Ghana’s Eurobond has fallen to below 7% as a result of strong demand for them by international investors, illuminating the increased confidence they have in Ghana’s repayment capabilities and this indicates that a second bond issue, if opted for, would likely replicate the success of the first one.
As a result of the country’s success in launching the 2007 bonds, Ghana was awarded two awards – the 2007 Emerging Market Bond of the Year and the Eastern Europe, Middle East and Africa (EEMEA) Bond of the Year by the International Finance Review at its 13th Gala Dinner in London, United Kingdom.
It was the then government’s intention to use the proceeds from the Eurobond to finance projects that would yield profits to enable the country pay back confortably. The projects planned included the construction of major highways on which tolls would be collected towards repayment of the facility.
However, largely because of external shocks created by a sharp spike in international crude oil prices and rising world food prices, and to a lesser extent because of a large number of capital projects that were not properly budgeted for, a substantial portion of the proceeds from the bond issue were diverted into balance of payment support.
The Minister of Finance, Dr. Kwabena Duffuor, announced government’s decision to create a special fund in which it will save to pay interest on the Eurobond and amortize early the $750 million principal which is due for repayment in 2017, but experts believe the country’s finances could seriously be affected by the early repayment of the non-concessional commercial loan.
Government plans to finance the deficit from both foreign and domestic sources. Foreign financing is projected at GH¢905.3 million, equivalent to 4.2% of GDP. As a result of the projected increase in the overall budget deficit, domestic financing of the budget is expected to be higher than the projection in the 2009 budget.
Consequently, the net domestic financing of the budget for the whole year is projected at GH¢1,304.4 million, 26.3% higher than the 2009 budget estimate of GH¢1,032.8 million.
On a broad coverage basis, data on the 2009 budget indicate that government fiscal operations resulted in a deficit of GH¢2.1 billion equivalent to 9.9% of Gross Domestic Product (GDP) compared with GH¢2.6 billion or 14.5% of GDP for the same period in 2008.
For the first three months of this year, government fiscal operations resulted in a narrow deficit of GH¢1.1 billion or 4.2% of GDP compared with GH¢100 million equivalent to 0.6% of GDP for the first quarter of 2009. The fast paced growth of expenditures observed in the first quarter of 2010 was driven mainly by the clearance of road and non-road arrears and part settlement of Tema Oil Refinery’s (TOR) indebtedness to Ghana Commercial Bank (GCB) all totaling some GH¢700 million 2.8% of GDP.
Expenditure management, though, has been very rigorous, although payment of high domestic interest, judgment debts, as well as, the projected shortfalls in revenues and grants, are expected to result in an overall end-year budget deficit of GH¢2,213.3 million, equivalent to 10.2% of GDP by the end of this year.
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