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The 15-Year Bond controversy [Article]

We have observed with a sense of amusement the controversy that has erupted as a result of the press conference held by the National Democratic Congress (NDC) on Tuesday, April 18, 2017, at which leading members of the main opposition party took issue with the recent long-term cedi-denominated bonds issued by the Government of Ghana during the first week of this month.

The press statement and ensuing briefing of the media in attendance by an NDC delegation led by Cassiel Ato Forson, former Deputy Minister of Finance made several allegations relating to the conduct of the incumbent government in general, and the Minister of Finance, Ken Ofori Atta and the Attorney General, Gloria Akuffo in particular.

ADI is strictly non-partisan and therefore does not and will not hold brief for the conduct of any individual, grouping or institution when such conduct conflicts with the interests of the Republic of Ghana itself. Therefore our comments on the issue are guided strictly by the national interest, rather than the narrower interests of the political parties involved in this latest controversy.

The NDC at the press conference alleged that there is a clear conflict of interest on the part of both the Finance Minister and the Attorney General, who both have interests in Enterprise Insurance Group, of which the Chairman of the Board, Trevor G. Trefgarne is also on the Board of Directors of Franklin Templeton, a major global portfolio investor, which, according to the NDC, subscribed to about 95% of the recently issued 15 year bonds. The NDC also questioned the pricing of the bonds and insists that the issue effectively amounted to a foreign loan and therefore should have been approved by Parliament prior to the actual issuance.

While we acknowledge the NDC’s right to engage in politicking with a view to winning the sympathy of the Ghanaian electorate ahead of future elections, we disagree with its attempt to discredit a transaction which is of immense benefit to Ghana’s troubled economy, on spurious grounds.

Firstly, we must point out that, the structure of the 150year bond issuance is no different from that applied by every political administration since the Kuffuor administration opened up subscription in government medium and long term cedi-denominated debt securities in 2007.

Indeed, the book-runners that handled the controversial new issuance – Barclays Bank Ghana, Stanbic Bank and Strategic African Securities – were appointed by the NDC government in 2015 when it changed over the issuance of medium and long term domestic debt securities from the erstwhile Bank of Ghana auction system to the currently used book runner system which indeed has proved to be eminently successful, both with regards to lowering the coupon yields insisted on by investors, and increasing the actual volumes of such securities investors subscribe to.

Thus for the NDC to now try to reclassify as foreign debt the very same instruments which it regularly issued as domestic debt during its most recent eight year tenure in office is bemusing to say the least.

The allegation that the issue was opened for only one day as against the three working days during the tenure of the Mahama administration, was simply because the pre-issuance negotiations between government and its book-runners on the one hand and potential investors on the other, were so successful that there was no need to keep the issue open for so long since investors had already assured that they would buy up the securities about to be offered.

The allegation of conflict of interest is doubtful to say the least. Neither Gloria Akuffo nor Dr Angela Ofori Atta, the wife of the Finance Minister hold executive positions in Enterprise and neither does Trevor Trefgarne in either Enterprise or Franklin Templeton. Thus they were not in a position to take executive decisions on behalf of any of those institutions. It should be noted that, the NDC admits that Franklin Templeton has been a regular investor in Ghana’s medium and long-term bond issuance, and during those times all three of the aforementioned people were on the same non-executive positions that is now the reason for the conflict of interest allegations.

The simple truth is that, the incumbent government has succeeded in the very same strategy of debt issuance applied by the erstwhile NDC government of selling cedi-denominated bonds to foreign investors, thereby attracting substantial, direly needed foreign exchange, but without incurring the commensurate foreign exchange rate risk, which is borne by the investors themselves.

However, the incumbent government has done so with a tenure of 15 years which far exceeds the maximum tenure of 10 years achieved under the NDC. Furthermore, the latest issue achieved a subscription volume far in excess of any issuance achieved by the NDC government.

It is these achievements that the NDC, for purely political reasons is seeking to discredit in an indirect manner.

Indeed, this is further exposed by its opening allegation that the incumbent government has already borrowed heavily, so early in its tenure, despite an election promise not to add to the public debt. However, the government has stated clearly that, the proceeds of the bonds issuance will all go into refinancing shorter term debt issued at much higher coupon rate.

This is a strategy used extensively by the NDC when in power because it is a very prudent strategy which both lowers government’s debt servicing costs and elongates the maturity profile of the public debt. As with the NDC, this does not add to the public debt stock.

With regards to pricing, it is true that the coupon rate at 19.75% is much higher than the Eurobond coupon rates which never exceeded 10.75%. However, in the case of the latest domestic bond issuance, the foreign exchange risk is borne by the investor.

This means that any cedi depreciation over the tenure of the bonds does not increase government’s debt repayment obligations in cedi terms, unlike in the case of Eurobonds which are denominated in US dollars. Indeed, it is instructive that the same NDC which is now doing the comparison of rates, issued bonds of even shorter tenure at coupon rates of between 22% and 26% during the last four years of its tenure.

ADI believes, based purely on the economics that, the latest bond issuance is a remarkable achievement for the Ghanaian economy. In one stroke it has added some US$2 billion to the country’s foreign reserves, thus supporting the cedi’s exchange rate; has enabled government to lower its debt servicing costs by replacing relatively more expensive debt with relatively cheaper debt; and has further extended the maturity profile of the public debt thus giving Ghana more breathing space with regards to repayment of the debt principal itself.

Consequently, and taking into consideration the NDC’s deliberate effort to make the latest bond issuance look different from its own bond issuances while in power, we are left with the conclusion that the NDC is only trying to score political points by discrediting a bond issuance which, in actual fact has been more successful with regards to volumes, pricing and tenor, than any issuance done by the NDC itself while in power.

By: Edward Sam