Ghana should have little trouble selling a debut 7-year domestic bond this week, but foreign investors may be wary given its large fiscal deficit, weakening currency and low dollar liquidity.
With Treasury bills and shorter-dated bonds trading at yields of at least 20 percent and inflation at a 3-year high, the West African cocoa, gold and oil producer also faces the prospect of locking in high borrowing costs for a long time.
While raising money in the international bond market would cost less - Ghana issued its second 10-year Eurobond in July at a yield of 8 percent - analysts say the new issue will enable it to deepen its local bond market and set a benchmark for corporates to issue debt.
Although Ghana is popular with foreign investors, who have dominated almost every sale of 3- and 5-year bonds since the auctions were opened up to non-residents in 2006, its yield curve is less extensive than those of its sub-Saharan African peers. Zambia and Nigeria have yield curves that extend to 15 and 20 years respectively. Kenya's goes up to 30 years.
“A 7-year issue is a good step forward in terms of debt management,” said Giulia Pellegrini, JP Morgan strategist for sub-Saharan Africa. “Of course, it would be cheaper for them to raise money on the external debt market but it's part and parcel of developing your yield curve locally.”
Ghana's central bank will offer a 100 million cedi ($46.9 million) 7-year bond at an auction on Thursday and a second bond of the same maturity in November.
The small size of the new issue should ensure that it is easily taken up, but analysts and investors expect a yield of 20 percent or more given that 3- and 5-year paper are trading around that level on the secondary market.
INVESTORS COOLER
Foreign investor sentiment toward Ghana has cooled somewhat after it recorded a fiscal deficit of 12 percent of GDP in 2012, up dramatically from its 6.7 percent target, said Mahan Namin, portfolio manager at Insparo Asset Management in London. The government has set a target of 9 percent for 2013.
“In the medium term, if Ghana manages to show more material evidence of fiscal consolidation then people will jump to invest in their bonds at the current yields,” said Namin.
Investors have also been spooked by the cedi's slide. It has fallen by around 10 percent against the dollar this year due to low liquidity in the interbank foreign exchange market at a time of rising importer demand for dollars.
Foreign investors are having trouble repatriating their dollars and those buying a 7-year bond may worry about being able to exit their position when they wish, analysts said, though Eurobond inflows should bolster Ghana's forex reserves.
The government is trying to encourage more local investors to buy longer-term bonds, aware of offshore investors' impact on the exchange rate.
“There have been occasions where we had a lot of pressure on the cedi because a greater number of foreign investors were selling their bonds and taking the money out,” said Sam Mensah, a government advisor who helped organise a roadshow last week for local banks, pension funds and insurance companies.
“We want to encourage more local participation and the key objective is to reduce exchange rate exposure.” -Reuters