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Analysis | Why Ghana went from hero to zero for investors


Ghana is learning the hard way why oil can be a blessing and a curse. The onset of commercial crude oil production helped transform the West African nation into one of the continent’s top investment destinations, but also pushed successive governments to borrow to the limit. Skittish investors redeemed Ghana’s bond and currency, the cedi, out of doubts about its ability to service its debts. The concerns proved well founded: In late November, the government said international bondholders would be asked to accept losses of as much as 30% on their principal loans and forego any interest as it tries to secure a $3 billion loan from the International Monetary Fund.

1. Why was Ghana so popular with investors?

Ghana, the first sub-Saharan African nation to gain independence from colonial rule, has been a bulwark of stability in a region beset by civil unrest and coups. Peaceful elections have been held regularly since the 1990s, power has changed hands between rival parties and presidents, and there is an independent judiciary and a vibrant parliament. Ghana, the world’s second largest cocoa producer and Africa’s No. 2 gold producer, began exporting oil in late 2010. The following year, gross domestic product increased by almost 14%. The economy has grown every year since then, albeit at a more modest pace, with the government embracing a free-market system that helped attract foreign capital and financing.

The government abandoned fiscal discipline and opened up spending taps in anticipation of an oil windfall. But the energy revenue wasn’t enough to cover a series of expensive flagship projects, and it borrowed more to close the gap. There was overspending, especially in election years. President Nana Akufo-Addo’s administration has abolished fees for high school students. In 2021, the government spent $1 billion refinancing loans from private power producers, a move designed to lower the state’s electricity bill. A plan to strengthen a banking sector weakened by bad loans has cost more than 25 billion cedis ($1.7 billion), with an estimated 8 billion more cedis needed to complete the process. Covid-19 has dealt another blow to the state’s already tight finances. After selling Eurobonds each of the previous nine years, Ghana was banned from international capital markets in 2022 as investors lost confidence in its ability to service its loans. The government shied away from an initiative that would have allowed it to suspend interest payments and pledged not to seek further IMF support before changing its tone in July 2022.

3. What has accelerated debt restructuring?

Government debt rose to 467.4 billion cedis at the end of September, or 75.9% of GDP, from 68.3% five years earlier. When it could no longer tap into international markets, the government resorted to domestic borrowing, paying an annual interest rate of nearly 30%. The central bank stepped in to provide funding to the government after it risked defaulting on local debt, but plans to limit further support to stay within the regulatory lending threshold. Lawmakers want Treasury Secretary Ken Ofori-Atta to take the blame for the economic crisis and have called for his resignation.

4. How have investors reacted to the meltdown?

There has been an exodus from the currency and bond markets. The cedi’s fall of more than 57% between January and the end of November 2022 made it the worst performer in the world. Demand from premium investors to hold the country’s dollar bonds rather than US Treasuries exceeds 3,000 basis points, well above the 1,000 level that indicates distress. Fitch Ratings cut its rating of Ghanaian credit to four levels below investment grade in September, the third cut in 2022.

5. What are the authorities doing to address the situation?

In late October, Akufo-Addo rejected speculation that a financing deal with the IMF could result in losses for all Ghanaian creditors, but his government reversed course a month later and said it would begin restructuring negotiations. In addition to the planned debt reduction, the government also pushed for a suspension of interest payments on foreign bonds for three years, said Deputy Finance Minister John Kumah. Domestic debt investors would be asked to exchange existing securities for new ones that can offer a zero coupon in the first year, 5% in the second and 10% in the third year. The president has pledged to restore financial discipline by reducing total government debt to 55% of gross domestic product by 2028 and pegging external debt servicing costs to no more than 18% of annual revenues by that year . The Bank of Ghana raised its key lending rate by 10 percentage points to 24.5% in the first 10 months of 2022 to support the currency and help contain runaway inflation. Ghana’s Vice President Mahamudu Bawumia announced that the government is considering using gold to buy oil products to curb the demand for foreign exchange and support the cedi.

–With assistance from Moses Mozart Dzawu, Yinka Ibukun and Paul Richardson.

More stories like this are available at bloomberg.com

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