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Analysing Ghana’s domestic debt restructuring (Part 2): From perspectives of debt reduction; debt rescheduling; and debt reprofiling and their impact on the economy

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Ghana’s expenditure has been driven by interest expenditure and the only option would be to restructure both its external debt as well as the huge and expensive domestic debt. Also, the persistent depreciation of the local currency against the US $ has contributed the unsustainable debt levels It can be concluded that Ghana’s debt levels are unsustainable, the country will have to take steps to restructure its debt to qualify for IMF assistance. The Fund states that it won’t lend to countries that have unsustainable debts unless the member takes steps to restore debt sustainability, which can include debt restructuring. From above Ghana must restructure its local currency debt as part of it’s plan to secure a US$ 3 billion loan from the International Monetary Fund. The country’s largest domestic debt holders include domestic banks, Bank of Ghana, non-bank financial institutions (NBFIs), private individuals, pension funds, insurance companies and foreign investors which must be engaged in debt restructuring that could entail debt reduction, debt rescheduling and debt reprofiling.

Ghana’s domestic debt restructuring could lower the wealth and income of individual households, directly through retail holdings or indirectly through shares in mutual funds and pension funds. In addition, domestic debt restructuring may affect availability of bank credit and cost of borrowing for Ghanaian companies and households with potential indirect distributional effects.  The bondholders’ losses from debt reduction, debt rescheduling and debt profiling could affect domestic banks and businesses from expanding, thus decreasing output. When output decreases, jobs will not be created and they cannot make profit and that will also affect the government’s ability to generate enough revenue through taxation to service its debt service obligations. The restructuring of domestic debt would be part of the Ghana’s debt sustainability plan required by the International Monetary Fund.

The country’s debt restructuring should focus on domestic bonds, though external debt could be included depending on how much Ghana would have to reduce its debt servicing costs to achieve fiscal sustainability. The only two instances of domestic debt restructuring in Ghana, in 1979 and 1982, primarily featured demonetization rather than principal haircuts or interest rate reduction (Imani Center Policy ,2022). From the data analysis of 10% Haircut of the total PV of Bond value of Domestic banks, Bank of Ghana, Firms and Institutions, and Individuals of GHC344,403,752,859 recorded a total loss of GHC33,913,361,127 compared to the data analysis of Rescheduling options where the Mark to Market of coupon rate of 26% from to 10% coupon rate with extended tenure from 5 years to 10 years which recorded losses of GHC 55,272,093,147 to the various bondholders.

From the data analysis of Rescheduling option where the Mark to Market of coupon rate drop from 26% to 10% with extended tenure from 5 to 10yrs with coupon payable over the 10year period also recorded bond value losses of GHC 108,446, 402,471 compared to the analysis of the Debt Reprofiling data indicates that the maturity extension at the prevailing rate of 26% for another five years domestic investor can loss a total of GHC 108,446,402,294 over the extended periodThe data analysis clearly shows that domestic investors could incur substantial losses in the debt restructuring

When considering the restructuring of domestic debt, a government usually only has three broad strategies as follows:

  • Shaving off some of the principal amount (“face value reduction” or “haircut”).
  • Changing the tenor or maturity of the debt, which is to say deferring payments.
  • Lowering the initial interest rate of the debt instruments.

With government securities constituting nearly 30% of assets, and exceeding 45% of income (due to the high concentration of “investment” funds in government securities among Ghanaian banks), any process that cuts face value(“haircuts”) will hit the risk-weighting of banks’ capital. Similarly, any process that touches coupons/interest rate will hit the bottom-line (profit after tax) of banks massively. The analysis of the study showed that the possible effects on financial sector, job losses, output losses, general health of the economy and loss of confidence in domestic investment.

However, negative relationship was identified between financial threat and total debt, stress, economic hardship and anxiety. Findings from this study imply that job loss, output loss, general health, information search and loss of investment are major factors that determined financial threat in Ghana. Moody’s downgrade of Ghana’s long term issuer ratings to Ca from Caa2 or further junk status on 30th November 2022 confirmed that creditors will likely incur substantial losses in the restructuring of both local and foreign bond holders and this thus confirmed the above analysis.

2.0 Ghana’s public debt dynamics

For the purpose of this paper, Ghana’s domestic debt restructuring (DDR) refers to changes to contractual payment terms of public domestic debt (including amortization, coupons, and any contingent or other payments) to the detriment of the creditors, either through legislative/executive acts or through agreement with creditors, or both.  The government has been engaging the country’s largest debt investors including local banks, firms and institutions, insurance companies, pension funds and private individuals in the domestic debt restructuring project that could entail extension of maturities, reduction in the coupon rates, haircuts on principal and interest payments.

A country’s debt dynamics includes both external and domestic debt, and debt accruing to state-owned enterprises and its maturity structure. All need to be considered when considering any debt restructuring. Ghana’s total public debt as of September, 2022 was US$48. 7 billion (GHC467.7 billion or 84% of GDP) from US$32.3 billion (GHS143 billion or 55.5% of GDP) in 2017, according to Bank of Ghana and Ministry of Finance and Economic Planning data. Of this, external debt was US$28.1 billion (GHS203.4 billion or 40.5% of GDP), while domestic debt issued in cedis was US$26.3 billion (GHS190 billion or 37.8% of GDP). The country’s debt to GDP ratio stood at about 84% (GHC467.4 billion with the domestic debt component stood at GHC195.7 billion with the external debt component reaching GHC 271.5 billion as at September,2022 of which the World Bank has projected to reach 107% by the end of 2022. Ghana has been thrust into debt distress as about 70% of its total revenue goes into debt servicing obligations thus leaving little room for other statutory obligations or investment in infrastructure.

The country’s debt reorganization will initially focus on domestic bonds, though external liabilities could also be included depending on how much Ghana would have to reduce its debt-servicing costs to achieve fiscal sustainability. Regarding external debt, the portfolio includes debt owed to multilaterals such as the IMF and World Bank, bilateral, commercial loans such as Eurobonds, and other export credits. The external debt also comprises of fixed (86.5%), variable (13.1%) rate and some interest-free (0.4%) debt. As of 2021, about 72% of the external debt was also dollar-denominated.

Based on the monthly bulletin published by the Central Securities Depository for September 2022, the total treasury bills and bonds issued by government stood at GHC 160.1bn. Banks were the largest holders with 31.6% (GHC50.6 billion), Firms & Institutions with 25.3% (GHC 40.5 billion), Others (including retail and individuals) with 13.9% (GHC 22.3 billion), Foreign Investors with 10.8% (GHC 17.3 billion), Bank of Ghana with 10% (GHC 16.01 billion), Pension funds with 5.6% (GHC 8.9 billion), Rural Banks with 1.4% (GHC 2.2 billion), Insurance Companies with 0.9%(GHC 1.44billion) and SSNIT with 0.4% (GHC0.6billion) .

 

Treasury Bills represented 16.4%(GHC26.25billion) of total securities, medium tenor bonds (2yrs to 5yrs) are 49.5% and long tenor bonds (6yrs and above) are 34.2%. Foreign investors hold 10. 8% (GHC 17.3 billion). The currency denomination of the domestic debt should not influence the inclusion or exclusion of certain securities from the restructuring. Including both local and foreign currency debt issued under domestic law in the restructuring will set ex ante equal conditions for both types of instruments and allow to achieve greater savings (e.g., Jamaica, 2010 and 2013).

For a highly dollarized economy, where the share of local currency debt is very small, there may be a case for excluding local debt from the restructuring, for example when those instruments are important for the operation of the domestic payments system and development of the local currency bond market (e.g., Uruguay, 2003 and Argentina, 2019).

The domestic debt of GHC160.1 billion excludes the Government treasury bills valued approximately GHC 26.25 billion which is not included in the perimeter of domestic debt restructuring.

According to IMF report (2021) including Treasury bills in the restructuring carries risks, but may be unavoidable in some cases, from these reasons Ghana government has excluded Treasury bills from the domestic debt restructuring.  Changing the terms of Treasury bills can have adverse effects on interbank liquidity, the central bank’s ability to conduct monetary policy operations, and the country’s capacity to manage its short-term payments. That said, when the share of Treasury bills in domestic debt is high, the sovereign may have no alternative but to include them in a debt restructuring (e.g., Barbados, 2018 and Russia, 2000) so as to reduce its short-term financing needs and rollover risk.

Where Treasury bills do not create large refinancing pressures, it is generally advisable to exclude them from the domestic debt restructuring. Domestic debt investors have already lost 52% of the USD value of their holdings this year and the government needs to weigh the fact that it needs access to the domestic bond market to finance the budget over the next three years in any decision on domestic debt restructuring. Debt restructuring can be done either via tenor extension, coupon reduction, reprofiling, principal haircut, or a combination of three or all options. With the USD value of domestic debt having been depreciated away, government’s focus should be on coupon reduction, combined with tenor extension if required, to reduce the interest cost of domestic debt.

By the IMF computation public domestic debt may include the debt of some of the State -Owned Enterprises (SOEs) and the outstanding of contractor arrears of GHC 10 billion as at September 2022 has to be factored in the public sector debt possibly excluding interests on the outstanding payment (Cherry, 2022)’ Ghana’s current unsustainable has led to high debt distress where the country will be unable to fulfill its financial obligations and debt restructuring will be required. Over the past six months, Ghana’s economy has experienced higher inflation which has been on a sustained upward trajectory. The rising inflation with the subsequent increases in Bank of Ghana’s policy rate have resulted in a rising interest rate environment.



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