What do investors want? High return on individual assets in their portfolios even at the cost of a high variance because the overall risk of their portfolio is hedged. Money always flocks to areas where returns are greatest. Hence investors would lend money to earn return that is deemed relatively high given the risks for that class of assets.

This investor behaviour is rational and evidence of this abounds. In extreme cases, investors even put huge sums of money into pyramid schemes and other fraudulent financial ventures to earn the promised super-normal returns. Thus, if an entity (corporate or government) issues a fixed income security (bond) with relatively high returns within a particular risk class into a market, that is bound to attract significant capital. It is, therefore, not surprising that the recent sovereign bonds sold by the government of Ghana at par to yield 8.5% was oversubscribed.

Presented below are some of the yields on offer for 10 year government and global fixed income securities around the time of Ghana’s sovereign bond issue:

Australian Government Bond: 6.16% German Government Bonds: 4.33%
Japanese Government Bond: 1.68% Singapore Government Bond: 2.69%
UK Government Bond: 5.01% USA Treasury Bond: 4.59%
Chile 10-year Global Bond: 5.14% Peru 10-Year Global Bond: 5.74%

The highest yield on offer, from the sample presented above, is the Australian government bond at 6.16%. Ghana’s bond issue offered over 230 basis points (1 per cent equals 100 basis points) to investors to hold Ghana’s bond relative to the highest yield on offer. It could be seen that the oversubscription can be explained by the government of Ghana offering relatively high returns, on this relatively safe asset, palatable to investors that other assets in its risk class are not offering. What it also portrays is that, despite global liquidity crunch, investors still have voracious appetite for high yield assets.

Thus, the oversubscription of the Ghana sovereign bond says more about investor motivation above anything else. Understandably, Ghana’s credit rating is lower than that of developed countries and, hence, must offer a higher yield to reflect the increased economic and political risks. The result of this is that, it makes it more expensive for Ghana to raise money through debts issues in the international markets relative to other conduits.

Ghanaians, therefore, need to solemnly reflect on why Ghana chose this conduit to go into debt because there is a very high price to be paid here. Ghana must make a semi-annual coupon payment of about 32 million dollars which must be serviced for the next 10 years (64 million dollars annually). Over the 10-year period, Ghana faces a total bill of almost 1.4 billion dollars from this debt. This is inclusive of the face value of the debt and exclusive of the hefty fees charged by the investment banks who managed the debt issue.

Investment banks like Citigroup, UBS and Data Bank don’t come cheap. Their fees are usually a percentage of the debt raised. Consequently, even if the fee charged by the debt managers is just a percentage of the $USD750 million, the amount of money involved is still very significant- $USD7.5 million.

These identified costs and other costs add up to the financial burden we carry as a nation. Notwithstanding the costs we have taken on, Ghanaians, thus far, have not been adequately informed on what the money would be used for and how the uses of the money raised would generate enough return to service the coupon payments and the repayment of the face value of the debt on maturity. Using woolly cloak of words, Ghanaian officialdom has dwelt mainly on generalities and not provided specifics to inform on the exact projects to be financed and the anticipated payoffs in explicit terms.

The overriding question is simple: Would the project(s) to be finance from this debt issue earn enough to pay off the debt? This question must not only be answered in the affirmative. The affirmative answer must also reflect the fact that Ghanaians are able to pay the cost for the service to be delivered that would ensure that the 8.5% is earned. We do not need to stretch our imagination to comprehend that paying over the odds for capital to finance the delivery of services to Ghanaians can, inevitably, lead to financial distress. This is because the service to be delivered has to be done at a cost that is affordable to the ultimate Ghanaian consumer.

Borrowing at a high cost contributes to high unit cost of the final service. When Ghanaians shun the service at the cost at which it is offered, then a financial and/or economic disaster could be eminent. An example of this would be building toll roads with the capital raised and Ghanaians using alternative roads because of the cost of using the toll roads to us. Thus, producing a service at a relatively high cost cannot be optimal. Knowing this, large borrowing entities, like governments, shop around to raise money at the most attractive rates to forestall potential economic disaster.

If Ghana is unable to earn enough from the uses of the funds to finance the loan, the burden of debt would put a huge strain on our limited finances. Herein lay the real and present concern to us as Ghanaians. Whereas corporate bodies could declare bankruptcy and limit the damage from financial distress should it arise as a result of having debt, governments do not have that “luxury” to declare bankruptcy.

Thus, the fall out from financial distress are more debilitating for governments. This is so because if this debt is financed from government revenues generated at the current levels, then, implicitly, public spending at current levels would be curtailed. This would not be good for individuals, businesses or the government. It is not very difficult to foresee this strain. For example, the Hon. Major (Rtd) Courage Quashigah, Minister for Health, announced earlier on this month that the government spends $USD77 million on malaria annually. Whether or not that amount is adequate is not the point here. What is important here is that this amount is almost equivalent to the annual coupon bill Ghana faces as a result of this loan.

If government funding for malaria treatment or other similar programs is wiped off or significantly reduced to enable the government service this loan, then it would affect individuals and, ultimately, businesses. It is clear to see that government borrowing at this time from other sources, e.g., international development banks, Bretton Woods Institutions, with much lower interest payments would have been highly desirable. Just a percentage decrease in interest payment alone from a loan sourced from other parties would have saved Ghana $USD7.5 million annually over 10 years.

Raising taxes as an alternative to cutting government expenditure to finance this loan issue is no less daunting. This is because the incidence of tax on Ghanaians is currently high. Taxes and charges on almost all government services have rocketed since the year 2000. Furthermore new taxes, e.g., ECOWAS tax and National Reconstruction Levy, have been introduced. Moreover, government subsidies have continually been tumbling. It is excruciating to think that government would add to the burden of businesses and individuals by raising taxes. Ghana would be worse off if this is to happen.

Printing more money (local currency) is no better option. There is also an additional risk, exchange rate risk that adds to the cost of the loan. The coupon payments and face value of the debt to be returned to investors on maturity of the debt would be made in US dollars. Government revenues are primarily in Ghanaian cedis. Therefore, any deterioration in the exchange rate between the Ghanaian cedi and the USD, for which Ghana is exposed to, adds to the cost of the debt. All these add to the question on why the government issued this sovereign bond. There are, seemingly, no measurable gains at all.

Ghanaians need to take umbrage at this sovereign debt issue because we are haemorrhaging cash to make investors “fat” and could have done better. We should not be happy because corporate high flyers are wearing ties made out of Ghanaian national colours in the corridors of financial power and smiling for the cameras as a result of the issue. Those in the corridors of financial power have, justifiably, earned juicy fees as a result of the issue and can afford to smile. We need to appreciate that the international bond market presents an opportunity and not a dare. Ghanaians need to puncture the untoward euphoria surrounding $USD750 million debt issue and ask ourselves the hard question. When we do the critical self-analysis, we will appreciate that the charm of the sovereign bond would recede really quickly in the rear-view mirror and be replaced by macabre reality.

Merely issuing a sovereign debt cannot be considered by Ghanaians as an apotheosis of financial or economic development. It must certainly be a case of narcissism if we think that the over-subscription to the sovereign bond issue was because the world loved us.


(Article written by Dr Michael Graham, Royal Melbourne Institute of Technology (RMIT) University, Melbourne. Australia.)