Ghana has been one of the worst performing EM sovereigns this year in the EMBI index, with a total return of -11.0%, behind only Argentina (-11.3%) and ahead of Ukraine (-7.5%), based on data from Haver (to cob 19 January). It compares to -3.3% on the EMIBGD index and generally only modest declines elsewhere in mainstream non-distressed SSA.
Ghana's foreign bonds this year have generally seen price falls of around 10-11% at the long end (excluding the World Bank guaranteed 2030s), and 6% on the four year (2026s) – we ignore the front end (2022s and 2023s) because they are now very small and illiquid, and the 2025s because it has special features (zero coupon bond). Yields have gone up by c300bps at the front/middle part of the curve and by around 120bps at the long end.
That said, the bonds did stage a 2pts rally across most of the curve yesterday.
Still, yields are in the 12-14% range.
What's going on?
While pronounced, we don't think these price moves have been driven by any recent (adverse) change in fundamentals. Fiscal concerns are well known, and have been for some time, and there has been little time since the 2022 Budget on 17 November for fiscal data to show anything either way, while Parliament's rejection of the E-Levy legislation took place in late November.
Indeed, the sell-off comes despite higher oil prices this year (Brent +12% YTD), although we think oil accounts for only a relatively small part of fiscal revenue (projected in the 2022 budget at 6.7% of domestic revenue and 1.3% of GDP) compared to the greater dependence of the external accounts on oil (oil exports were 24% of total goods exports over March-October last year, based on BoG data).
Rather we think it is the rise in US bond yields this year (10yr +c30bps YTD) that may be behind the move, and the implications for market access, as Ghana is seen as among the more vulnerable EM and frontier economies to a deterioration in EM financing conditions given its high financing needs (fiscal GFN was 24% of GDP last year, according to the IMF). This has resulted in a loss of investor confidence (but not quite capitulation).
True, Ghana had already lost market access back in October-November (with the yield on the '32s rising to over 10% and the government cancelling its sustainability bond), so that's not news either. But perhaps investors were anticipating that that would turn around. Instead, even higher yields raise the prospect that Ghana will be cut off from market access for even longer, beyond just the first quarter, creating a vicious cycle. That said, it is premature to say the market will be closed to Ghana all year, although access will be contingent on more benign external conditions and, crucially, an improvement in domestic fundamentals.
Nor is Fitch's downgrade the main driver. Fitch downgraded its rating one notch from B to B- on 14 January, bringing it into line with Moody's (B3) and S&P (B-), and this may be behind the further easing in prices earlier this week (-2pts, although this has since been reversed following yesterday's rally), but most of the damage was already done by then.
Meanwhile, the Ministry of Finance responded on 14 January to what it said was a misleading Bloomberg article in a statement on its website, although that could be read in two ways – either a sign of desperation or signalling that the government is no longer indifferent to what investors think (which may be a good thing).
The finance minister said on Wednesday (19 January) that the government will re-submit the E-Levy legislation to Parliament on 25 January. The E-Levy, announced in the 2022 Budget, seemed to form a key part of the government's fiscal strategy, although the revenue yield looks fairly modest to us. However, while clearly believing the legislation will pass, the government has also sought to play down its significance, noting that it only forms part of its overall strategy ("it won't solve all our problems"), perhaps preparing the ground if it isn't.
And the following week (31 January) is the conclusion of the Bank of Ghana's first monetary policy meeting of the year. However, while this should give some more up-to-date data, it is still too early to say what this means for the fiscal outlook this year (if we're lucky, we'll get January's fiscal performance but we cannot read too much into one month, and even that will be before all the 2022 budget measures have been approved, let alone fully taken effect).
The central bank's monetary policy committee (MPC) raised its policy rate by 100bps, to 14.5%, at its last meeting on 22 November, reversing the 100bps cut in May. Since then, inflation has risen further and the currency has weakened. CPI inflation rose to 12.6% yoy in December, well above the 6-10% medium term inflation target band, and compared to 11.0% in October (at the time of the last MPC meeting), while the cedi has fallen by c2.5% against the US dollar. While some of the increase will be seen as transitory, further rate increases seem likely.
Financing implications
The question for investors is what does the financing outlook look like without a bond issue? On that, we would say, despite the severe market reaction (to which we have some sympathy), the outlook should still be manageable in the near term (although that shouldn't obviate the need for continuing a deeper fiscal consolidation effort, given public debt/GDP of c80% and high public sector financing needs).
But firstly, how much are we talking about? In its 2022 Budget, the government expected foreign financing of US$1.5bn (1.8% of GDP) this year, split evenly between external loans and the remaining part of the SDR allocation. The government anticipated raising at least US$750mn on the international market this year (that could be in the form of bonds or from commercial banks). Hence, a US$750mn "hole" would not seem to be unbridgeable.
What are the options to compensate for not being able to issue a eurobond? Any shortfall in securing that amount of external market funding would seem to be easily covered, providing the fiscal deficit is no worse than projected, from own resources (gross reserves were US$10.8bn in October (4.9 months of imports), according to BoG data, and even net international reserves were a comfortable US$7.3bn), official sector financing sources (multilateral or bilateral loans, but clearly the authorities have no interest in an IMF programme), or forcing more reliance on domestic financing, which may be feasible (for a time). However, reserves may come under pressure if the authorities seek to defend the currency, and the currency could come under pressure with higher inflation and/or greater use of domestic funding.
Alternatively, on the spending side, the authorities could accommodate lower revenue through cuts in current spending or capex.
This was the message from the finance minister yesterday, who said that the government may cut spending by up to 20% if revenue targets aren't met. The comments seemed to reassure nervous investors, reportedly causing the bonds to rally, but that's no news either. It's what Ghana has been doing for the last four years or so in the face of persistent revenue underperformance. And ultimately it is not sustainable either. Nor did he give specifics as to where those cuts may come from – given public sector pay and debt interest already account for a large part of government spending, the scope for cutting discretionary spending is more limited.
While reassuring (or rather, this is what you might expect him to say), the market is still concerned that revenue is being over-estimated and investors will be sensitive to revenue shortfalls and the funding implications. The 2022 Budget projected a c40% rise in revenues, with revenue/GDP increasing from 16% to 20%, and a decline in the overall budget deficit from 12.1% of GDP in 2021 to 7.4% in 2022 (including restructuring costs) and from 9.4% of GDP to 6.4% (excluding restructuring costs). Stronger economic growth will help (real GDP grew by 6.6% yoy in Q3 2021, and 5.2% for the first nine months of last year, according to the MOF), although this could be complicated by a central bank tightening cycle. Moreover, the budget is not completely approved yet, pending Parliamentary approval on revenue measures (spending has been approved), and will cause delays to the start of the revenue measures.
One problem will be if the budget looks like missing the deficit target by a wider margin, which will raise harder political choices and put greater pressure on spending cuts and/or domestic funding sources, force the authorities to seek more creative funding sources, or force the authorities to tolerate a wider deficit (at the risk of further damaging its credibility with investors).
Meanwhile, the favourable debt service profile (no big amortisations until 2025) provides some relief from any extended period of loss of market access, although such relief may be "offset" by domestic funding pressures.
Investment implications
We retain our Hold on Ghana's dollar bonds, which we reiterated most recently as a trade to watch in our Top Picks for 2022. While the fall in Ghana's bonds this year has brought prices more into line with expected recovery rates in our illustrative restructuring scenarios, we don't think they have reached fair value and they have further to go under the more severe scenarios.
Conversely, at double-digit yields, the bonds offer a lot of upside if confidence returns and a liquidity crisis does not look imminent given the alternative funding options at Ghana's disposal in the near term. However, for now, we think investors might prefer to wait to see actual evidence of domestic revenue gains before leaping in, especially given the challenging external (rates) environment.
