Ghana’s debt is taking deeper into danger as investors lose patience

Ghana's debt is taking deeper into danger as investors lose patience

As the period of cheap cash attracts to an end, bondholders are not generally ready to cut Ghana any slack. The West African country’s dollar bonds have drooped 10% in 10 days, moving further into a troubled area as investors judge that re-financing obligation in the Eurobond market will not be a choice when the Federal Reserve climbs rates and budget targets stay tricky. The extra premium requested on Ghana’s sovereign dollar debt bounced on Wednesday to a normal 1,105 premise focuses, from 683 premise focuses in September.

Investors are questioning whether Ghana — the region’s second-biggest economy — can sustain its debt levels if a surge in borrowing costs shuts it out of international markets. Government debt climbed to 81.5% of gross domestic product at the end of last year, from 31.4% a decade ago, according to data compiled by Bloomberg.

Its $27 billion of foreign debt had the worst start to the year among emerging markets, extending last year’s 14% loss, according to a Bloomberg index.

That places Ghana among the most vulnerable credits to tighter U.S. monetary policy, despite strong economic growth.

The West African nation’s $750 million bonds due in March 2027 fell 10 cents this month to 79.4 cents on the dollar on Thursday, sending the yield to nearly 14%. Of 14 Ghanaian dollar bonds, 13 are trading with an extra premium of at least 1,000 basis points, a level considered distressed, a Bloomberg index tracking sovereign debt showed.

“The market has woken up to the fact that this is a country with a lot of outstanding bonds,” said Kevin Daly, investment director at Aberdeen Standard Investments in London. “A lot of people went into last year with overweight positions and a lot of them have started to throw in the towel.”

“I don’t expect them to default in 2022, as they have enough foreign-exchange reserves, but medium to longer term, it becomes an issue as Ghana has lost access to the Eurobond market for rolling over debt,” said Joe Delvaux, a portfolio manager at Amundi in London. “They have too much debt for the size of the economy and investors have lost conviction in the government’s willingness to consolidate spending and take necessary measures.”

The government’s failure to pass a new levy on electronic money transfers through parliament in November also made investors doubt whether it has the political capital to pass revenue-raising measures in parliament or reign in spending to reduce borrowing needs.

The opposition to the tax reform and plans to end a subsidy on pharmaceutical and vehicle imports will make it hard for the government to meet this year’s budget deficit target of 7.4%, down from 12.1% last year. “There’s no appetite for a new Ghana issuance at this stage and probably won’t be until the government has consolidated is public finances more meaningfully,” said Carlos de Sousa, who helps oversee a $3.8 billion developing-nation bond fund at Vontobel Asset Management in Zurich.

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