Ghana’s credit outlook does not look promising, even after the government’s successful issuance of the novel zero coupon bond on the international capital market last month. As ‘weird’ as it sounds, investors twice oversubscribed the debt instrument; but why would investors risk it?

Moody’s Investor Services, a global rating agency, stayed Ghana’s credit outlook at B3 negative highlighting the sovereign’s elevated debt burden and weak debt affordability as risks.

“A high debt burden, revenue underperformance and its heavy reliance on international capital flows, worsened by the COVID-19 pandemic, have negatively affected Ghana’s creditworthiness.”

Moody’s Vice President, Kelvin Dalrymple intimated that: “The negative outlook reflects the rising risks that the pandemic poses to Ghana’s funding and debt service due to the country’s exposure to shocks because of its high dependence on external financing.”

Ghana’s Eurobond success

All the while, the government has attributed the success of the Eurobond sale to high investor confidence in Ghana’s medium-to-long term framework towards fiscal consolidation.

However, this is not entirely the case, considering the fact that a handful of African issuers, specifically Benin, issued its Eurobond in January and saw its rating outlook improve.

Thus, Ghana’s novel zero-coupon bond success reflects three fundamental reasons: The timing of bond issuance, promising recovery of the global economy, and high interest rates mostly characterizing African debt instruments.

Meanwhile, Ghana’s Eurobond issuance, a zero-coupon bond is multi-tranche including 4-year, 7-year, 12-year and 20-year bonds. After issuing a $5 billion in Eurobond, Ghana raised $3 billion from the investor market.

More so, this issuance was at a time when the country’s debt-to-GDP ratio hit a record high of 76.1% as at year-end 2020.

Thus, Ghana’s Eurobond issuance can be considered to serve as a test case for other debt-burdened African issuers. Specifically, this meant that African issuers could weigh investors’ appetite for debt instruments on the continent. Currently, it is reported that Kenya and Angola are considering issuing Eurobonds in the coming months.

Basis for Ghana’s Eurobond Success

Ghana’s Eurobond was issued at a time when foreign investors were still in search for high-yielding bonds or higher interest rates compared to very low longer-term interest rates in the US and other jurisdictions.

The yields on longer-term bonds in the US were near zero last year. For example, 10-year US Treasury note increased from ½ percent in August 2020 to 1¾ recently.

Therefore, Ghana’s Eurobond was highly subscribed by investors in the US, Europe and China .

Furthermore, this was a time when the global economy was seeing a more-than-expected recovery. The IMF, in its Economic Outlook, revised global economic growth to rebound to 6% in 2021. Thus, foreign investors revived their appetite for Ghana’s debt on the back of these developments.

Moreover, the interest rates mostly characterizing debt instruments (Eurobonds) in Africa drove this purchase. Along these lines, the Minister of Finance, Ken Ofori-Atta is cited to have said that, “there is no basis for us borrowing at 6%, 7%, or 8% while other countries borrow at cheaper rates.”

Similar sentiments have been shared among analysts in recent times on why African debts attract high interest rates, while countries with similar debt profiles and sovereign rating pay relatively low interest rates.

However, Ghana’s zero-coupon bond attracted approximately 8% interest on average. While there are several reasons for this high-interest charge, one of the reasons is due to the high risk of Ghana’s debt instrument.

As pointed out earlier, Ghana faces high risks of debt servicing due to unsustainably high debt levels, and as such, the higher the risk, the higher the returns (compensation) to investors.

Therefore, it is critical for the government to ensure that it diligently follows through with its outlined fiscal consolidation path to reduce its debt levels, going forward.