By Ekow Dontoh
Ghana is learning the hard way why oil can be a blessing and a curse. The onset of commercial crude production helped turn the West African nation into one of the continent’s top investment destinations, but also prompted successive governments to borrow to the hilt. Skittish investors offloaded Ghana’s bonds and currency, the cedi, amid doubts over its ability to settle its debts. The concern proved to be well-founded: In December, the government caught bondholders by surprise by unilaterally suspending interest payments on its external debt ahead of restructuring talks aimed at pinning down a $3 billion loan from the International Monetary Fund.
1. Why was Ghana so popular among investors?
___STEADY_PAYWALL___The first sub-Saharan African nation to gain independence after colonial rule, Ghana has been a bastion of stability in a region plagued by civil unrest and coups. Peaceful elections have been held regularly since the 1990s, power has changed hands between rival parties and presidents, and there is an independent judiciary and a vibrant parliament. The world’s second-biggest grower of cocoa and Africa’s No. 2 gold producer, Ghana began exporting oil in late 2010. The following year, gross domestic product leaped by almost 14%. The economy has expanded every year since then, albeit at a more modest pace, with the government’s embrace of a free-market system helping to lure foreign capital and financing.
2. So what went wrong?
The government abandoned fiscal discipline and opened the spending taps in anticipation of an oil windfall. But energy revenue wasn’t enough to cover a succession of expensive flagship projects, and it borrowed more to plug the gap. Overspending was particularly rife in election years. President Nana Akufo-Addo’s administration has scrapped fees for senior high school students. In 2021, the government spent $1 billion on refinancing loans owed by private power producers, a move that was intended to reduce the state’s electricity bills. A plan to strengthen a banking industry weakened by bad loans has cost more than 25 billion cedis ($2.8 billion), and an estimated 8 billion cedis more is needed to complete the process. Covid-19 dealt a further blow to the state’s already stretched finances. After selling eurobonds for each of the previous nine years, Ghana was shut out of international capital markets in 2022 as investors lost faith in its ability to service its loans.
3. What precipitated the debt restructuring?
State debt ballooned to 467.4 billion cedis at the end of September, representing 75.9% of GDP, up from 68.3% five years earlier. When it could no longer tap international markets, the government resorted to taking out domestic loans, paying annual interest rates of almost 30%. The central bank stepped in to provide the government with funding after it risked defaulting on the local debt, but it plans to limit further support to stay within its legal lending threshold. Opposition lawmakers wanted Finance Minister Ken Ofori-Atta to take the fall for the economic crisis and have called for his dismissal, but the ruling party refused to back a motion to censure him.
4. Why did the IMF step in?
The government shunned an initiative that would have enabled it to suspend interest payments and vowed not to ask for further support from the IMF, before changing its tune in July 2022. In late October, Akufo-Addo dismissed speculation that a funding deal could translate into losses for any of Ghana’s creditors, but a month later his administration said it would enter into restructuring negotiations. The nation secured a staff-level agreement with the Washington-based lender for a $3 billion, three-year extended-credit facility in December, but final sign-off from its executive board is contingent on a deal with external creditors.
5. What’s the government been telling investors?
In late November, it said it would ask holders of its international bonds to accept losses of as much as 30% on their principal debt and forgo interest payments for three years. It also appealed to domestic debt investors to voluntarily exchange existing securities for new ones that will offer a zero coupon in the first year, 5% in the second and 10% in the third, but that proposal attracted little interest. Then in mid-December, the government suspended interest payments on $13 billion of eurobonds, as well as commercial loans and most bilateral obligations pending the conclusion of a restructuring deal. The president has pledged to restore financial discipline by reducing total public debt to 55% of GDP by 2028 and peg external debt-servicing costs at no more than 18% of annual revenue by that year. The Bank of Ghana raised its key lending rate by 12.5 percentage points to 27% in 2022 to support the currency and help tame runaway inflation.
6. How have the markets responded to the meltdown?
There’s been an exodus from Ghana’s currency and bonds. The cedi’s decline of more than 37% between January and mid-December 2022 made it one of the world’s worst performers, although the currency regained some lost ground after the in-principle funding deal was reached with the IMF. The premium investors demand to hold the country’s dollar bonds rather than US Treasuries exceeds 3,200 basis points, well above the 1,000 level that signals distress.
Read more:
- Investors turn to private debt in search of compelling cash yield
- Investors overseeing $5 trillion are betting that an economic recession can be avoided
- Pity African countries as the US dollar strengthens
With assistance from Moses Mozart Dzawu and Yinka Ibukun.
© 2022 Bloomberg L.P.
