Sovereign debt default will have dire consequences for Ghana’s economic recovery  

The upcoming coupon payments for the new bonds, along with the government's commitment to fulfilling obligations on the old bonds, are poised to significantly influence market dynamics in the second half of 2023

Investors are on edge as the looming 22 August deadline for the treasury’s August 2023 coupon obligations approaches.

Concerns have arisen due to delays in servicing old bonds in the past, which were left untouched during the Domestic Debt Exchange Programme (DDEP).

According to recent data, calculations based on outstanding balances of the unredeemed old bonds suggest a principal obligation of approximately GHC6.06 billion and a coupon obligation nearing GHC290 million for the specified period.

Furthermore, a combined principal and coupon obligation of around GHC1.84 billion were due within the past months, preceding the payment date for the new bonds in August 2023. With a 5 percent cash coupon rate for 2023, it is estimated that the coupon obligation on the new bonds will amount to about GHC2 billion in August.

In the political arena, the government’s adherence to its bond agreement, encompassing both old and new bonds, carries significant weight as the likelihood of a successful re-election bid [breaking the 8-year mantra] in 2024 becomes increasingly uncertain.

This move would not only boost investor confidence but also send a pivotal signal throughout the market.

Fitch Ratings has sounded a clear warning of potential downgrades if the first coupon payments due in August 2023 are not honored. In its July 2023 report, Fitch indicated that failure to meet these payments could lead to a downgrade of the issue ratings on the bonds issued upon the completion of the domestic debt exchange. The country’s ratings were affirmed at ‘RD’.

However, Fitch also highlighted factors that could potentially lead to positive rating actions, including restoring relations with a majority of non-tendered securities bondholders and successfully restructuring local-currency bonds held by pension funds. Fitch would then assess Ghana’s Long-Term Local-Currency IDR based on its ability and willingness to honor its local-currency debt commitments.

The Domestic Debt Exchange Programme (DDEP) has not been without controversy, particularly marked by the Pensioner Bond Holder’s Forum’s (PBHF) protests against the pending principal and coupon payments on old bonds. The PBHF members have previously picketed outside the Finance Ministry in protest of their inclusion in the DDEP, a requirement for securing a US$3 billion bailout from the International Monetary Fund.

The recent suspension of protests followed the government’s demonstration of commitment by resuming coupon payments on June 27, temporarily averting another planned picketing on June 29, 2023.

While the government granted the pensioners exemption from the program after facing pressure, it still struggled to meet matured coupon payments consistently.

“The settlement of coupon arrears and the commitment to pay off the outstanding principal is a positive step, but there is still a significant obligation that remains. We are eagerly waiting to see the government’s actions, which will shape our next steps,” stated a PBHF representative.

The repercussions of the bond situation have already impacted commercial banks, which experienced significant impairments in 2023, leading to capital erosion.

A successful coupon payment in August, without distress, could potentially prompt banks to reevaluate their holdings of domestic treasury bonds.

Market observers caution that the substantial principal obligation and additional strain from coupon payments could have ripple effects on the banking sector and bond investors. The outcome of these impending obligations and their potential ramifications will undoubtedly mould the financial landscape in the market.

Because credibility is at stake and the stakes are high, government of Ghana must act in good faith by promptly repaying its restructured bonds that fall due this month. Investors expect the government to meet its obligations. Ghanaians are anxiously waiting on how government repays its matured bonds to determine if NPP is a government that keeps its words.

Yes, to gauge if NPP is caring enough to warrant breaking the 8 in the upcoming 2024 election. The entire world is watching to see how Ghana successfully handles its restructured domestic bonds.

Government must then do all it can by rising to the occasion as default on its restrucured domestic bonds will have dire consequences on not only its external debt restructuring but also on the general economic recovery process currently underway.



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