A few African countries have been able to issue a US dollar denominated bond to borrow money from the international financial markets. There have been little to no conditions attached but there might be a high price to pay, as the issuance of Ghanaian bond shows.
The issuance of a 31-year bond worth US$ 1billion in March 2019 was done with the involvement of a syndicate of international banks, including J.P. Morgan Securities plc, Merrill Lynch International, Morgan Stanley & Co. International plc, The Standard Bank of South Africa Limited, and Standard Chartered Bank.
These investment banks normally ask high fees to operate and promote the issuance of the bond.
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In addition, the Ministry of Finance also appointed five co-managers that were Ghanaian investment banks and advisors, namely Databank Brokerage LTD, Fidelity Bank Ghana Limited, IC Securities (Ghana) LTD, GCB Bank LTD, and Strategic African Securities LTD.
It is not clear what the costs have been by the Ministry of Ghana to involve so many managers for the bond issuance and the disclosure of the fees for each of these managers would certainly be welcomed by the people of Ghana.
One of the co-managers, Databank Brokerage LTD, is part of Databank and an important player in the financial markets in Ghana, as a broker for government bonds amongst others.
Finance Minister Ken Ofori-Atta has been the co-founder of Databank in 1990 and was its executive director until February 2012.
The wife of Minister Ken Ofori-Atta, Professor Angela Lamensdorf Ofori-Atta is a Non-Executive Director at Databank, although her high level expertise is in medicial and labor issues, not financial issues.
In the information available about the bond issuance, there was no mentioning of the potential conflict of interest between the Non-Executive Director of Databank and the Minister of Finance who is responsible of appointing the co-managers.
The Prospectus does not mention the Finance’s Minister’s relationship with Databank. It only mentions in general terms: “Save for any fees payable to the Managers, so far as the Issuer is aware, no person involved in the issue of the Notes has an interest material to the offer”.
In order to promote the issuance of the debt, the Minister and Deputy Minister of Finance as well as the Governor and Deputy Governor of the central bank and Deputy Minister for Energy went to the US and London to meet 120 investors face-to-face and via conference calls.
This three-day trip was dubbed the ‘Ghana on the Rise‘ roadshow.
The US$ 1bn of the Ghanaian government’s 31-year bond will have to be fully repaid, or refinanced, by the Ghanaian public budget by 26 March 2051.
The semi-annual interest payments (‘coupons’) totalling 8.95% per year, means a debt service of US$ 89.5 million per year and a total of US$ 2.77 bn in 31 years, for the benefit of the bond holders.
Such high debt servicing can endanger financing of the many economic, social and environmental needs.
These bonds are only a small part of the full Ghanaian debt, some of which has higher interest rates.
Many believe that the latest bond issuance was used to buy back other more expensive debts, not to serve the economy or achieve the sustainable development goals.
The Cedi was experiencing important devaluation pressures in the preceding months of the bond issuance, and had clearly experienced a speculative problem.
After the bonds were issued, the currency (the Cedi) gained 4.2 percent against the dollar.
It was believed the reason investors were betting that the income of the bonds would ‘boost central bank reserves and help it protect the Ghanaian currency, which had weakened 9.6 percent’ by 19 March in 2019.
The Finance Minister called this ‘really a speculative bubble’.
This means the debt repayment can become very expensive if the Cedi would be subjected to speculative attacks and has to devalue
Also, part of the bonds were integrated in investment funds and mixed with bonds of many other emerging market and developing countries.
If some of these countries are unable to repay as is the case with Argentina, investors can quickly sell off their participation in the investment funds.
The investment fund manager has to sell bonds from all the countries in his fund, which then puts more speculative pressure on the value of the currency and the bonds of all these other countries.
As the Ghana experience shows, global investors are interested in buying bonds from Ghana and other so-called ‘frontier countries’ because they have high interest rates, but the investors do not care if that increases the debt burden.
Investors sell off as soon as they see opportunities to make profits elsewhere.