Ghana’s forthcoming sale of $1 billion in sustainable bonds is likely to succeed – but may deliver less in terms of ESG impact than lenders hope.
The sale, planned for July, is billed as Africa’s first sale of “social debt”. Part of the money will be used to pay for educational and environmental projects.
After Ghana’s sale of $3 billion in debt in March, including a $525m zero-coupon bond, there’s little doubt that the funds will be forthcoming. “I am sure they will be able to raise it” and the sale could end up being oversubscribed, says James Dzansi, country economist at the International Growth Centre (IGC) in Ghana.
Current and previous governments have a strong record of raising debt, Dzansi says. “The know-how in accessing international markets is there.”
Growth prospects for Ghana are strong, which will improve the country’s debt metrics, Dzansi says. “I don’t see them struggling to repay their loans. The chance of a default is extremely low.” The Economist Intelligence Unit (EIU) predicts that rising oil output will lift real GDP growth to an annual average of 3.6% in 2022-25, from 2.6% this year.
Still, there are concerns over the medium-term sustainability of Ghana’s debts. Ghana says its public debt stood at 76% of GDP at the end of 2020, but the IMF puts it at 78%. The fund does not accept Ghana’s 11.8% to GDP fiscal deficit figure for 2020, putting it at 15.5%. The difference is because the government counts the cost of banking sector reforms and some energy sector debts as memoranda items, while the IMF counts them as current fiscal spending.
New Investor Base
Bondholders who focus on frontier markets are likely to already hold some Ghanaian debt from the March bond sale, so the July offering will target an investor base with “little or no previous exposure to Ghana,” says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. “The size of this pool and their risk appetite is hard to gauge, meaning that the ‘greenium’ discount on the yield on sustainable bonds versus conventional bonds may be less than the government is hoping for,” he says.
Ghana’s debt will increase as a result of the debt, Bohlund says. He points out that less than half of the $250 million of the 2023 eurobonds targeted for buyback with the last eurobond proceeds were accepted. Government claims that only $1.5 billion of the total $5 billion in debt it is targeting this year will be new indebtedness should be taken with “a pinch of salt.”
Bohlund cautions that domestic debt maturities will increase rapidly in the second half of 2022 and in 2023, meaning debt sustainability will be tested going into the 2024 elections ahead of a sharp rise in eurobond maturities starting 2025. “Achieving cost control and fiscal consolidation with the current hung parliament and high borrowing costs will be extremely challenging.”
The fact that the government spends over half of its revenue on interest payments means there “must be a tipping point when either further borrowing is not possible or interest rates increase substantially,” says Adrian Lawrence, a partner at Ashurst in London. “The fundamentals will need to continue to make sense to investors and so a dry-up of investor demand for Ghanaian eurobonds will not be resolved solely by issuing sustainability bonds.”
“Substantial parts of Ghana’s bond issuances are being used to refinance existing indebtedness, and so there may come a tension between being able to refinance existing debt as required and ensuring sustainable purpose use,” Lawrence says. Part of the demand for Ghana’s debt is coming from investors looking for high coupons. This demand could be affected if other sub-Saharan Africa countries increase their sales this year, Lawrence adds.
Despite the unpromising medium-term outlook, Ghana should be able to raise the money provided it can meet the conditions set by Environmental, Social and Governance (ESG) investors, Bohlund says. Anaïs Auvray, West Africa consultant at the Africa Matters advisory firm in London, agrees. Ghana is “one of the most stable and promising investment destinations in Africa and is known for being a disciplined and reliable borrower,” she says.
Questions remain over the use of the sustainable label. Auvray notes that Ghana is not subject to any specific sustainable finance-related regulations or obligations, leaving it with the “tempting option” to use part of the funds for debt servicing. The fact that some of the new bond will be used to refinance existing debt means that only part of it will be used for sustainability projects.
“The devil is in the detail,” says Dzansi at the IGC. As well as refinancing, the new bond will be used for social, educational and environmental projects – a very broad definition of “sustainability,” he notes.
“It’s not like this money is going to come in and tackle an environmental issue,” Dzansi says. The money will make it easier for the government to manage debt payments, so the bond will have “more of a macro impact than a climatic one.” Ultimately, Auvray says, the use of the money will depend on how eager Ghana is to maintain its status as a reliable and attractive bond issuer. If it wants to keep this status, the government “will need to ensure that the funds raised from sustainable bonds are directed towards environmental and social programmes. If not, it risks losing face” with ESG investors.
Ghana is also hoping to develop a domestic market for green bonds. Its securities and exchange commission in May agreed with the World Bank’s International Finance Corporation (IFC) to promote development of a green bond market. The IFC will help the SEC to develop guidelines for those selling the bonds.
Auvray is more cautious on whether such a market can be developed. Success, she says, will depend on overcoming hurdles such as a lack of understanding of eligible assets, a lack of clarity on the project pipeline, insufficient supporting policies and guidelines, and uncertainty over credit and market risks. These dangers are accentuated by the lack of a formal rating system in the country, she adds.
Dzansi notes that Ghana’s stock exchange is thinly traded and illiquid, so it is “not obvious” that there will be adequate local demand. Green bonds “have to start somewhere,” he says. “But I am not particularly confident.”
Safety Net Spending
New research from Samar Maziad at Moody’s suggests that spending on social safety nets may be a better way of reconciling credit quality and social impact. Maziad writes in June that safety-net spending improves responses to shocks and so supports sovereign credit quality. That conclusion is based on a sample of 137 emerging and frontier jurisdictions, which were sorted into five groups according to the strength of their safety net.
Moody’s put countries into five categories using three criteria: total spending on safety nets, the percentage of the population protected and the amount of spending going to the most vulnerable groups. The countries in the best group were Belarus, Croatia, Georgia, Hungary, the Kyrgyz Republic, Mongolia, Serbia, South Africa and Ukraine. Ghana came in the fourth of the five groups, allocating just 0.6% of GDP to safety-net spending in 2020.
Of course, the positive sovereign credit impact that Moody’s attributes to safety nets might just reflect the fact that richer countries find it easier to manage their debts and provide social protection. The surprise is that safety nets are relatively inexpensive. The average fiscal cost of safety nets in the Moody’s sample was 1.54% of GDP. Safety nets have not been “a major contributing factor” in higher government spending during COVID-19, Maziad writes. Spending on social safety nets “does not materially increase fiscal risks”.
David Whitehouse, PhD is a freelance journalist in Paris, and business editor of The Africa Report.
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