What next after Ghana's Debt 'Exchange'?

Word on the street is that Ghana’s drama-filled debt restructuring/exchange program (“DDE”) saw between 60% and 65% of all eligible extant marketable government securities (simply, “bonds”) tendered in by their holders in exchange for new bonds offering lower average interest and longer average repayment tenures.

Investors accepted losses of between 19% and 47% instead of the 55% to 88% (depending on inflation & discount rate assumptions) they would have suffered under the government’s original December 5th 2022 plan.

Whilst the outcome is perfectly in line with analysts’ expectations, the government had held out hopes of hitting its 80% non-binding target, and postponed the program 5 times to increase chances of doing so. Deniable leaks from government sources to selected media in Accra pegging participation at 70% are considered less credible, and at any rate don’t change much by way of effect.

After a week that saw pensioners, some in wheelchairs, accost Finance Ministry officials and a former Chief Justice declare the entire exercise a complete illegality, the DDE architects can breathe a sigh of relief even if the participation rate and debt relief outcomes, the worst in modern world history, are not exactly stellar.



Still, as we have argued elsewhere, the DDE was the easiest, and not even the most politically costly, way for the government to raise a large amount of money. At a 65% participation rate, the government will pay roughly 6 billion GHS on the tendered debt versus the roughly 17 billion GHS it would have paid on the old instruments in 2023. In subsequent years, the government’s payment obligation will almost double, but for the biggest creditors, this increase in payout will be deferred until after the 2024 elections.

At first approximation, the DDE thus represents a transfer of roughly 11 billion GHS from the private sector (and, minimally, the Bank of Ghana) to the government in 2023 alone, an amount higher than what the state takes in from external VAT (~8 billion GHS), and National Health Insurance and GETFund Levies (~9.3 billion GHS); and only a little lower than revenues from import duties (~14 billion GHS).

Given the disrespect with which they have been treated, the private sector have been most deferential to the government by forgoing such a large amount of money. As we have repeatedly said in these pages, Ghana’s DDE was by far the most unorthodox the world has seen since Argentina’s much-derided program in 2000. The country seems to have taken a leaf from Argentina’s repeat game in 2020, and then carefully overdone the theatrics.

No country in the world has ever launched a DDE or any sovereign debt restructuring program of this magnitude without extensive informal consultations with major creditors ahead of the official commencement of the program. There is a reason why the average time for conducting a debt exchange in the last two decades is in the range of 11 months. People like to refer to Uruguay’s program in 2003, which officially took 7 weeks from formal launch to settlement. However, the launch was preceded by more than three months of intensive discussions with all the key creditors.

Ghana’s decision to rush through the process and string together a series of unilateral deadlines on a take-it-or leave-it basis, whilst reflective of the governing style of the current government, was thus completely unprecedented.

It had led many to wonder whether the playbook created by Lazard Frères’ Eric Lalo and Michele Lamarche, which has been in use during this whole enterprise was worth the multi-million dollar advisory fees.

Of course, this being the first time an African country has dared to restructure its domestic bonds, perhaps Lazard can be excused for their lack of sparkle. Those in the know do say that Lazard was quite effective during Ivory Coast’s restructuring of Brady Bonds in 2009 and that the subsequent faltering in attempts to establish a regional base in Abidjan owe more to the vicissitudes of the sovereign debt advisory market than to any failings of substance.

Yet, watching the Lazard Sovereign Advisory method that Ms. Lamarche, Monsieur Eric Lalo and Monsieur Matthieu Pigasse honed over decades of practice flounder in the midst of all the drama we have been served in the last couple of weeks was a sight to behold for many analysts.

It is true that Lazard sovereign debt restructuring advisors don’t shy from combat when that is necessary to score an important point. But the decision to walk back on previous commitments made to exempt pension funds and the tactless handling of the pensioner concerns, such as waiting for these elderly citizens to start issuing threats before engaging seriously, were not signs of spunk. They smacked, instead, of clumsiness.

Which is why some observers feel that Lazard was not allowed by its Ghanaian principals to bring all those years of advising Greece, where far more complex matters were afoot, and Ecuador, widely praised for the sophistication of the stakeholder engagement process, to bear.

Such a view would not be altogether sound though in view of some of the rather hairy spectacles Lazard got entangled in during Argentina’s 2020 post-default negotiations with creditors.

Whatever be the case, whether it was Lazard that pushed these hardball tactics or the Finance Ministry, the ball remained throughout the period in the court of the wider government of Ghana to ensure alignment between this narrow debt restructuring program and the broader political economy of getting Ghana away from the brink of the economic abyss it is currently staring into.

Let us not mince words here, the admission that the Bank of Ghana had to print money equivalent to roughly half the government’s domestic revenue in order to service debt over the last year and stave off a default has thrown the country’s overall fiscal situation into very stark relief.

Analysts are now even clearer in their forward view that debt relief of 11 billion GHS a year, as delivered by the just-ended DDE, is far from sufficient to get Ghana back on the path to macrofiscal stability.

The country is now literally using short-term treasury bills at nearly double the cost of the bonds it says it can no longer afford to finance day to day government operations. In no time, all the gains from the DDE debt relief will be wiped off simply from the escalating costs of fresh domestic borrowing. $1 billion from the IMF this year will certainly not substitute for the $4 billion in curtailed international inflows. Greater relief is urgently required.

Moreover, judging from the posturing of China, it does not look likely that a quick Paris Club deal can be arranged in the government’s preferred March timeframe via the Common Framework.

The IMF may have to waive the bilateral debt restructuring requirement if the plan is to get the much coveted board approval for Ghana’s provisional staff agreement in the Spring. At any rate, bilateral debt relief should provide something in the range of $100 million or so a year, a clearly insignificant amount in the wider scheme of things.

If the analysis above is correct, then the next big drama ahead for Ghana is swift and smooth Eurobond restructuring talks with its external creditors. Reports that Franklin Templeton participated in the domestic debt exchange are encouraging but they do not completely assuage concerns about the coolness shown by many other offshore investors towards the just-ended DDE.

After Ghana chose to suspend servicing its Eurobond debt without so much as the ritual courtesy of applying for consent, external bondholders like Pimco, Fidelity, Goldman Sachs, and BlackRock have had to signal, albeit subtly through well-placed hints, that they will not be walkovers going forward.

The balance of probabilities incline in the direction of moderately tough negotiations in respect of the government’s reported demands for a moratorium on servicing its Eurobond debt. We are pessimistic of a total moratorium request being accepted by Ghana’s Eurobond investors.

They will be taking cue from how Ghana’s refusal to build proper consensus ahead of the DDE through extensive consultations forced the sovereign to consent to some of the most creative pari passu violations in world debt default history.

Ghana’s goal of a billion dollars of debt relief in 2023 from Eurobond restructuring is thus ambitious and, in light of the DDE performance, possibly unattainable.

Should the government succeed in wringing out about half of that, the country still faces a $2.5 billion dollar hole that must be addressed through other forms of fiscal adjustment besides debt restructuring. It bears mentioning that this is a conservative figure.

In these circumstances, the original debt restructuring program would clearly need supplemental strategies. In the recent past, we have discussed plans to accelerate treatment of non-marketable debt, to tackle the debt of state-owned enterprises like Cocobod and the Electricity Corporation of Ghana (ECG), and to explore ways of dealing with mounting energy sector debts.

There is aggressive language coming from some government quarters about forcing power producers to accept cedi conversion of forex liabilities among others.

The downside of all this uncertainty is the prolonging of the souring plight of the financial sector. Despite repeated assurances of a swift recovery of enthusiasm in the domestic bond markets, the high holdout rate blocks the government from seeking to apply exit amendments and other tactics to damage the old bonds in favour of the new bonds.

No doubt government advisors are even at this moment contemplating all manner of devices to seek to penalise holdouts. They would do well to exercise caution. The dramatic interventions of the former Chief Justice were meant to send a clear message: judicial elements who may have been personally affected by the exercise shall take a dim view on any legally dubious punitive measures brought against holdouts.

Consequently, the high quantity of circulating high-yield old bonds will exert competitive pressure on the low-yield new bonds even as the high interest rate environment contributes further to depress value. Consequently, the likelihood of a ratings improvement for the new bonds is low, as are the prospects of market recovery in 2023.

Another interesting angle is the implicit seniority that has been introduced among government creditors, with the biggest financial players at the bottom of the heap. The unintended consequence is that smart banks and insurance companies will reduce their holdings of all government debt, Including treasuries.

Smart pension funds can take advantage of the situation by creating products that harness their newfound seniority to give risk averse market participants safe exposure. But it is unlikely that this development alone will do much to shift asset ownership power in Ghana’s financial industry to pension funds, given all their other constraints.

The net effect, in the short term at least, therefore is a lowering in institutional demand for government securities and sustained upward pressure on government borrowing rates.

As we have said in preceding paragraphs, the government’s timeline of an IMF board approval of its staff-level agreement in March 2023 increasingly looks more and more unrealistic since successful Eurobond restructuring is critical in lending credibility to the debt sustainability program, which is a vital precondition for even a moderately successful IMF program. The real question is whether approval in the Spring, i.e. by May, is feasible.

Of course, the IMF precondition only requires good faith efforts to restructure the debt not sterling outcomes. And, given where we are, the IMF is likely to accept some lacklustre debt relief outcomes in the medium-term. Nonetheless, such pragmatism would need to square with maintaining the credibility of the program.

Meaning that acceptance of lack-lustre results in order to preserve a timeline of Board approval by the time of the Spring meetings (i.e. by mid-April), which is the most aggressive schedule feasible, has to be weighed against market perceptions about the viability of the fiscal treatment.

Otherwise, a board approval announcement will give the fiscal indicators only a short-lived boost as was seen in December 2022 after the announcement of the provisional staff level agreement.

Supposing that a mid-April board approval is reached on the basis only of “good progress” with the external restructuring effort but before concrete debt relief assurances are secured, the IMF will have the option of securing Board approval but then making any tranche-one disbursement contingent on a successful program review later in the Summer of 2023.

In short, the next six months will require deft management of the country’s highly limited forex reserves and revenue inflows given massive pressure on both. Any slip, such as forex market adventurism, will see a return to the twin crisis of skyrocketing exchange rate depreciation and inflation spirals by May. The next twelve months, as a whole, will be shaped by market perceptions of the credibility of the IMF program.

If the government sticks to the same approach that it used in the domestic debt exchange, and continues to make the economic recovery effort a mere partisan-administrative activity, instead of one based on broader consensus, not even an IMF board approval in the Spring will correct the course of the fiscal crisis and avert a full-blown economic catastrophe.

To repeat for emphasis, the government must not:

fail to mobilise a serious national consensus behind a short- to medium- term austerity plan;

dilly dally in presenting a credible strategy of how it will cut public expenditures to plug the fat fiscal hole, by shrinking at least 25 billion GHS of its expenditure sheet; and

ignore calls to establish an independent “value for money” and “monitoring and evaluation” program with a remit spanning across the entire set of budgeted government programs.

Otherwise, Ghana should brace for a very rocky journey through 2023 and 2024.

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