Ghana’s new Eurobond softens IMF straitjacket ahead of elections

Ghana will have more fiscal room to maneuver ahead of elections as a fifth Eurobond gives the nation funds to pay debt and implement projects amid spending restrictions imposed by the International Monetary Fund.

West Africa’s second-largest economy raised $750 million at a yield of 9.25 percent last week in an auction that was more than four times oversubscribed. About $400 million of the bond proceeds will be used to refinance the nation’s first 10-year bond which matures in 2017 while the rest will be used for capital projects, Finance Minister Seth Terkper, said in an interview in the capital, Accra, on Sept. 7.

President John Dramani Mahama, who will in December run for a second term in office, last year agreed to almost $1 billion in loans from the IMF to help rein in the budget deficit and arrest declines in the cedi. During negotiations that ended earlier this month the Washington-based lender sought assurance that the country won’t use funding from the Bank of Ghana before releasing a fourth portion of $115 million under an extended credit-facility deal. Last week’s bond issuance means Ghana will probably not call on the next tranche of the IMF bailout this year, Landesbank said.

“They won’t give in to IMF demands as long as there’s enough demand for cedi bonds,” Lutz Roehmeyer, a money manager at Landesbank Berlin Investment, which oversees about $12 billion of assets, said by phone from Berlin. “When the next crisis is there and Ghana has no choice, they’ll do it. But for now, they’ll avoid it.”

‘Constructive Discussions’

Ghanaian lawmakers passed legislation last month that allows the government to borrow as much as 5 percent of the previous year’s revenue from the central bank, contrary to the IMF’s demand for zero financing from the Bank of Ghana. Terker said the government will continue to implement the IMF program and has not made use of central bank financing in the year to date.

The IMF concluded a staff visit to Ghana on Sept. 2 and said it held “constructive discussions” on the credit facility. It also wanted to make sure financial pressure faced by state-owned companies in the energy industry will not pose additional risks to the government’s budget, the lender said in a statement on its website.

Ghana’s Eurobonds have returned 5.8 percent since the beginning of August, compared with the average of 4.3 percent for dollar debt of 17 sub-Saharan African nations, Bloomberg indexes show. Yields on the nation’s 2023 notes have dropped 102 basis points in the period.

“Investors continue to price in the risk that the government will embark on a pre-election spending spree, but we expect that while there will be some slippage, a repeat of the ramp-up in spending which took place prior to the 2012 vote will not happen,” analysts at BMI Research said in an e-mailed note to clients on Monday. “Yields will fall further next year.”

Ghana’s budget deficit in its previous election in 2012 was 12.1 percent of gross domestic product. The gap narrowed to 6.5 percent of GDP last year from 10.2 percent in 2014. The fiscal shortfall in the first five months of 2016 was 2.5 percent of GDP against a target of 2.2 percent, Terkper told lawmakers in July.

The Ghanaian economy expanded 3.9 percent in 2015, the slowest pace in 15 years, according to IMF data. The finance ministry said in July growth will probably accelerate to between 4.1 percent and 4.3 percent this year as new oil projects start contributing to output.

“The bond gives Ghana some comfort,” Michael Cobblah, a director at C-nergy Ghana Ltd., an advisory and investment banking services company, said by phone from Accra. The IMF “program aided in the success of this bond so I expect the consolidation to continue,” he said.