Even as Ghana takes its third big step to extricate itself from debt distress, bond investors face a new complication: political uncertainty.
(Bloomberg) — Even as Ghana takes its third big step to extricate itself from debt distress, bond investors face a new complication: political uncertainty.
The West African nation’s government reiterated it has sought relief from bilateral lenders including the Paris Club and China under the Group-of-20 Common Framework. The move follows an offer to local-currency bondholders for a debt swap with coupon reductions and a unilateral move to suspend payments on external debt.
While the process could prove arduous at the best of times, it’s coming just when Ghana faces political change. The ruling New Patriotic Party will pick its next president later this year and two ministers have quit in the past week presumably to join the leadership race. While that could bring new faces and a new approach to the negotiating table, general elections due 2024 mean there’s no guarantee the next government will abide by anything that’s agreed.
“You could definitely argue that external bondholders would be better off seeking to close a restructuring deal with the current government,” said Mark Bohlund, a senior credit research analyst at REDD Intelligence. “However, there’s likely to be enough opposition among creditors to frustrate such a process with many wary that whatever is agreed with the current government is unlikely to be upheld were there to be a shift in political power at the next elections.”
Investors are still reeling from the last surprise that Ghana threw at them. In a change of strategy a week before Christmas, the government suspended interest payments on $13 billion of eurobonds as well as commercial loans and most bilateral obligations pending an agreement with creditors. That stunned investors who had hoped for a more consensual procedure.
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The country’s currency has resumed a selloff. While the cedi rallied the most in emerging markets in December, it has tumbled 20% since Dec. 19 when the announcement was made. The action has also complicated the country’s path back into international capital markets to which it has lost access. However, its priority may be to unlock $3 billion assistance from the International Monetary Fund, for which it won an in-principle agreement in December.
“The declaration of the suspension of most external debt servicing without a consent solicitation process was a change of tack from a strategy that had previously been more investor-friendly than other debt distress cases,” Bohlund said. “It does indicate that the government strategy has abandoned any hopes of regaining Eurobond market access before the December 2024 elections and is focusing on unlocking IMF funds as quickly as possible.”
The decision led S&P to become the first ratings agency to downgrade Ghana’s external debt to “selective default.” Even though Finance Minister Ken Ofori-Atta said authorities would start restructuring talks with external bondholders in the second half of the week of Dec. 12, no offer has been publicly made. Ghana is being advised by Lazard.
Muted Response
Meanwhile, local-bond investors pushed back after the government published a bond swap offer. Negotiations led to an agreement to exempt pension funds from the swap and the eventual publication on Christmas Day of a revised debt swap offer with new exit bonds.
“Government has shown total disregard for the contractual rights of individual bondholders and has made no effort to structure reasonable consultations,” the Ghana Individual Bondholders Forum said in a statement. “We have been presented with painfully stark, impoverishing and unsustainable choices. This is only possible because of the absence of effective representation.”
The man who’s overseeing Ghana’s journey back to debt sustanability is facing an uncertain future himself. In December, Ofori-Atta survived a censure motion by the parliamentary minority to be removed over the crisis, and calls for him to step down have resumed early this year.
While Ghana has no dollar debt maturing until July 2023, it faces 43.5 billion cedis ($3.1 billion) in domestically-sold local-currency bonds maturing through the end of June, according to data compiled by Bloomberg. All told, bondholders are waiting for restructuring proposals on about $8 billion of local bonds and $13 billion of dollar notes. On top of that, it has $663 million coupon payments on dollar debt.
“Access to credit has now been cut off and will take a long time to re-establish, necessitating a radical change in how Ghanaian politics are run,” Bohlund said. “It is an open question if this can be done within the two main parties through a promotion of younger officials or if we will see new parties taking over and replacing them.”
–With assistance from Yinka Ibukun, Ekow Dontoh and Samuel Gebre.
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