Monday, October 24, 2016/ 9.15am /BMI Research
BMI View: Ghana's recent and previous eurobond issuances will outperform in 2017, following the December 2016 presidential elections. 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, and that yields will fall further next year.
In a positive for both the Ghanaian economy and the incumbent National Democratic Congress (NDC) administration, Ghana successfully issued a new dollar-denominated security on September 9, which we expect to be one of the better-performing Sub-Saharan African dollar-denominated securities in 2017.
The USD750mn eurobond will be repaid in three instalments – in 2020, 2021 and 2022 – a similar tactic to that adopted when Ghana issued a USD1bn eurobond in October 2015.
Dividing repayments will make it easier to meet repayments targets, thereby encouraging investors. The new security, which was oversubscribed by more than four times, launched with a yield of 9.25%, a considerable improvement on the 10.75% yield on the October 2015 issuance – and that security was 40.0% guaranteed by the World Bank.
While the government has claimed that the lower yield is primarily a product of Ghana being on a sounder fiscal footing, we think it is more a result of global trends that have seen eurobond yields fall across Sub-Saharan Africa (SSA).
Nevertheless, as the government's fiscal position continues to improve, we expect yields on Ghanaian securities to continue to fall in 2017.
Global Trends The Key Driver
In recent months we have seen Eurobond yields across SSA drop sharply. This is in line with a broader move in emerging markets (EM), as lower-for-longer yields in the developed markets have bolstered appetite for EM assets.
On aggregate, we expect that global tailwinds will keep investors bullish on SSA fixed income in the coming months, and further issuances before the end of the year are likely.
Lower yields have been a major boon for Ghana, and Finance Minister Seth Terkper has been vindicated in not having issued the bond earlier in the year when conditions were less amenable.
Ghana's previous eurobonds were trading as high as 12.70% in April, and we anticipated that a new security issued at that time would command a yield of at least 12.00%. In August the planned eurobond issue was pulled after investors demanded too high a yield.
The new eurobond will in part be used to refinance existing debt, and given that Ghana's government debt repayments already account for over 25.0% of expenditure, keeping yields low is essential if the government is to continue hitting the targets of the IMF programme it entered into in 2015.
While we believe that the lower yield at launch is primarily a result of global trends, the improvement in Ghana's macroeconomic position since it has been engaged in the IMF programme cannot be ignored and will have played some part.
The government has successfully stabilised the currency, reduced the fiscal and current account deficits, and inflation has finally started to fall – dropping to 16.7% yo-y in June after peaking at 19.2% in March.
As Terkper noted in comments after the eurobond was issued, the launch of the TEN oilfield in August, amid rising global oil prices, will considerably boost government revenues from hydrocarbons over the next several years.
Despite the improving economy, yields on Ghana's securities will remain among the highest of SSA dollar-denominated debt over the next six months, especially as long as there is uncertainty over whether Ghana will continue in its IMF programme after parliament passed the Bank of Ghana Act on August 2.
This allows the government to borrow from the central bank, in direct contravention of the IMF's stipulations.
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