Business in Ghana

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Fitch Warns Ghana On New Eurobond

Posted by Business in Ghana on June 10, 2014

By Sudip Roy, FT

Fitch has warned that Ghana will find it “increasingly challenging” to sell its new Eurobond due to mounting fiscal and external vulnerabilities.

The West African nation is rumoured to have hired Barclays, Deutsche Bank and Standard Chartered for an up to US$1.5bn Eurobond, though the timing of the deal has yet to be determined.

A successful deal may ease immediate external funding pressures. But even though Ghana, as with other emerging markets, has seen its outstanding debt rally significantly over the past few weeks with its 2023 notes trading at just under 8% compared with more than 9% at the end of April, Fitch reckons the cost of any bond “would likely be high.”

The ratings agency has highlighted the country’s vulnerabilities in a new note published on Monday, especially the central bank’s role in funding Ghana’s budget deficit in the first quarter.

“Printing money to finance the deficit will aggravate already high inflation (14.7% in April 2014) and contribute to further cedi weakness,” said the note, adding the currency has fallen 21% since the start of the year.

Fitch said the government had difficulty selling Treasury bills in the first quarter due to rising yields. “Non-banks – usually among the largest purchasers of government paper – became net sellers in [the first quarter]. Instead, the 2.1% of GDP 1Q14 budget deficit was financed by the central bank, which provided funding equivalent to 10% of government revenue – twice the Bank of Ghana’s own full-year limit.”

Planned issuance of five and seven-year bonds in March and May were postponed because of punitive rates.

Fitch says external financing conditions will remain extremely tight over the coming months. “Foreigners held 21% of domestic debt at end-2013, down from 26% in 2012. Of this, roughly one quarter was due to mature by the end of this month. With some recent auctions suggesting foreigners’ unwillingness to rollover existing debt, this could see a further outflow of funds adding to pressure on the cedi.”

Fitch rates Ghana Single-B with a negative outlook. “A further deterioration in external finances and an erosion of international reserves that jeopardised external financing capacity are ratings sensitivities,” it said.

Ghana has ratings of B1 and Single-B from Moody’s and Standard & Poor’s, both also with negative outlooks.

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