Ghana’s increasing debt vulnerability risks is limiting its own ability to obtain much-needed loans, as well as that of its neighbors by casting doubt on the entire creditworthiness of sub-Saharan Africa, say financial experts.
According to an expert opinion proffered in an assessment on Starfor, an American geopolitics publisher and consultancy, In October, the risk premium on Ghana’s Eurobonds increased by nearly 150 basis points (bps) to a yield of more than 900 bps (9%) over comparable U.S. Treasury benchmark securities.
This sharp increase, according to Stratfor, underlines the country’s growing indebtedness and reliance on external financing as global credit conditions tighten and interest rate hikes take hold.
“But given that Ghana is one of the largest Eurobond issuers in sub-Saharan Africa, it also indicates global investors’ increasing risk aversion, which will affect funding costs for 19 other countries in the region with outstanding Eurobond debt,” Starfor stated.
It pointed out that the spread on Ghana’s credit default swaps (CDS), a form of insurance against non-payment, more than doubled over its average for the past year to 1,033 bps over U.S. Treasury CDS yields. Among 64 countries with outstanding CDS, only those for Argentina, El Salvador and Sri Lanka cost more.
Ghana was planning to issue an additional $2 billion worth of new Eurobonds in November, though the sale has since been postponed.
With the high-interest rates required, the projected total interest costs for Ghana’s debt would have been more than 9% of GDP and one-third of budgeted expenditures for 2022.
Due to the country’s debt conundrum, it has become very risky to lend to it with creditors increasingly concerned with the country’s weak public finances and this is robbing off other African countries because of the country’s strategic position in the sub-region as the biggest Eurobond issuer.
Under Akufo-Addo, Ghana was the first country in the region to return to international capital markets with $3 billion in new Eurobonds in March 2021 after capital flight from emerging markets and developing countries abated during the first year of the COVID-19 pandemic.
Yet, the borrowing was at higher interest rates, ranging from 7.75-9.25% depending on the term, and shorter maturities than pre-pandemic levels with credit conditions tightening.
Ghana was able to maintain a slightly positive real GDP growth of 0.4% in 2020 through a combination of high fiscal spending that increased the country’s overall budget deficit to 15.2% of GDP. Central bank lending to the government also increased by 4.4%.
Its 2021 budget aimed to reduce the fiscal deficit to 10.5% of GDP, with plans to bring that level down to 8.1% by 2025. But these deficit levels are still extraordinarily high compared with Ghana’s 2010-2019 average of just over 6% of GDP.
In mid-October, government revenue fell short of the target by 12% in the first seven months of 2021 and is likely to continue at that rate for the rest of the year. At 14.9%, the government’s revenue-to-GDP ratio is below the 15% minimum the World Bank considers necessary to provide essential government services.
Starfor warned that further increases in public debt may not be sustainable, especially given Ghana’s large external financing needs.
Financial markets have recently been sending this message by re-pricing the country’s credit risk. The International Monetary Fund (IMF) and World Bank classify Ghana as at high risk of debt distress, although a July analysis said the country’s current debt could feasibly be paid if appropriate reforms were taken.