Ghana’s Eurobond Oversubscription And Economic Confidence


Written By:
Peter BoamahOtokunor
(An Economic Policy Expert)

In the post 1990 era, investors have become very accustomed to high bond market returns. And this point is emphasised by the Wall Street Journal written shortly after the terrorist attack on The World Trade Centre in September 2001.

Investing in bond markets can sometimes be very risky, especially on the African continent. Bond markets are supposed to be risk free with predictable returns as analysts would want to put it, but empirical evidence available has it that most countries in Sub-Saharan Africa (SSA) are characterised by unstable political systems and poor economic management, hence making them risky investment destinations.Thus, it requires a bit more sophistication by economic managers to earn high level foreign investments with lower yields in the form of foreign bonds.

Ghana is no exception in the factors that affect the pricing and the yields on bonds. Topical among these factors are the stability of interest rates and the risk associated with both Treasury and non-Treasury investments with regards to the political dynamics of the times, as well as history. Mind you, once upon a time, there was a government that refused to honour all international financial obligations.The fact is that, any serious analyst will not overlooksuch a factor. The importance of interest ratetrendscannot be over emphasised. In Ghana interest rates have had a very unstable trend and this must be considered in bond pricing.

In a Globalised system with abundant profitable businesses and unlimited business opportunities,corporate bondswill tend to have higher returns in a shorter period than Treasury bonds, because the more risky a bond is, the higher its yield.

The question then becomes which investor would want to subscribe to a risky and low yielding Treasury bond? Your answer is as good as mine.
According to REUTERS, the second quarter of 2013 has witnessed very turbulent bond markets across the world. This makes it otherwise difficult for governments raising money from the bond market.Thus governments interested in raising money from the bond market would have to do more to incentivise investors into buying or subscribing to their bonds.

The case of Ghana
In July 2013, government of Ghana floated its second Eurobond after the 2007 debut that raised $ 750 million with a yield of 8.5% for 5 years.This time, she sought to raise some $ 1billion from the international bond market at 8% interest ratewith bond maturity of 10 years.It was announced that government has received about $ 2.2billion bids, which reflects a 120% oversubscription.

The Minister of Finance and Economic Planning, Mr. Seth Terkpe has attributed the oversubscription, to the investor confidence in our economy. In fact, I couldn’t have agreed with him more, because for any professional broker or analyst, whatwould have obviously informed such level ofsubscription, will simply have been a choice for a comparatively lower investment risk and a higher marginal gain.

Now, the question becomes how risky can an investment in Ghana be?
In my expert opinion, Ghana is fairly risky as an investment destination, owing to our political and economic history. Besides, we are going through a rigorous test of our ‘democratic incubation’, with the current election petition in the Supreme Court. There have also been several inflammatory comments from opinion leaders, politicians and some religious leaders as well, expressing fear of civil crisis and so on. These undoubtedly breed some level of investment uncertainty, because investment decisions thrive on information albeit public or private. Even though Ghana’s democracy has been described as a successful model in SSA,we have remained an island in a region of political turbulence, and that could also ascribe some substantial level of economic risk to the country as well.

Secondly, how does our interest rates trend look like vis-à-vis the interest rate on the issued Eurobond?

Ghana has maintained an average of 16.56% interest rate between 2002 and 2013. This generally would have occasioned a large amount of foreign investment, because it appears fairly high in the region. But on the contrary, the issued Eurobond only carried an interest rate of 8% which brings about an interest rate deviation of about 8.56% from the average interest rate. This means that, the investors would have been8.56% better-off investing in other areas such as the stock market and other investment instruments in Ghana. Thus, one can safely conclude that,the Eurobond issued was notall that exceptionally favourable to the investor.

So the question then remains, why the oversubscription?
Per the above analysis, the over-subscription was borne purely out of confidence in the future economic prospects of the country, perhaps, informed by the economic growth and political stability chalked over the past few years.

Other pundits have also raised concerns about why Nigeria will issue the same 10 year bond at 6.5% and Ghana will issue same at 8%?
The answers may not be farfetched if sought after. Nigeria has maintained an average interest rate of about 9.17% compared to the 16.56% of Ghana over the same period.

Even though, Nigeria remains quite unstable politically, with recent bloody terrorist’s attacks from ‘Boko haram’, it carries huge proven oil reserves of about 37.2 billion barrels while Ghana carries a meagre 660 million barriers. So Nigeria’s political risk may not be enough to drown her economic potential so far as her oil reserves are concerned. That can generate a stand-alone assurance or security enough to raise a 10 year bond at even 5% interest rate or lower and it will still be oversubscribed.

Thus, comparing Nigeria’s Eurobond and that of Ghana is a non-starter and may be likened to comparing apples to oranges. It is not surprising at all, that Ghana’s Eurobond was over-subscribed, simply because Ghana has shown a promising and a remarkable economic potential due to recent medium term performance.

The inflation targeting policy of the Central Bank has been a remarkable success. It has resulted in a single digit inflation, which appears to be the lowest in the history of this country since the 1950’s. In 2010, Ghana recovered from a chronic inflation rate hovering around 20% in December 2008, to a creeping low inflationof 9.5%in June 2010. This creeping level of inflation was maintained throughout the period until an all-time low of 8.39% was achieved in August 2011. These achievements, coupled with the over 14% economic growth in 2011 have made Ghana an outstanding investment destination with unlimited economic prospects and opportunities.

I think we have abright future in terms of oureconomic prospectsas a country and its continuous management with the current energy and commitment, augmented with a little more innovation and sophistication will surely get us there.

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