Coupons and discounts are direct payments to investors for cash advanced and risk taken. Ghana’s first bond was issued at par with a coupon of 8.5%.

The highest coupon on any issue was 10.75% in 2015. Coupons have generally hovered around the 8.5-9.0% handle with some outliers.

Then, of course, a much-vaunted zero-coupon bond was issued in March 2021, but that didn’t necessarily come cheap when you factor in the 22% discount applied.

The fourth tranche of $500m 21-year bonds issued earlier in 2021 had a discount of 3.41%, making it the most expensive in terms of investor payout, given that its coupon was 8 .88%, a total of 12.3% cent.

Typically, 2021 issuance was more expensive in terms of coupon rate than 2020. This signaled investor fatigue and the need to reward investors for generating the necessary absorption.

If this trend continues, which appears to be the case given the worsening debt-to-GDP situation, future Eurobond costs will be on the upside.

Transaction fees and other fees

Issuing a Eurobond is a highly specialized technical area requiring the use of seasoned specialists in the international capital market, including investment bankers, lawyers and analysts.

The Ministry of Finance, the local institution that leads Ghana’s Eurobond business, does not have adequate staff with these capabilities on staff and therefore relies heavily on external experts for a fee.

In addition to the fees paid to transaction experts, there are also listing fees paid to the stock exchanges on which Ghana Eurobonds are listed.

In addition, the jurisdictions where these exchanges are registered must also grant regulatory approvals to listing and the fees charged for such approvals.

In some cases, external guarantees are necessary, which was the case in 2015. This reduces the risks of the issue to an acceptable level for investors.

However, these guarantees entail costs in favor of the guarantor institution.

As a general rule, all these transactions and other costs represent around 4 to 5% of the gross amount of the Eurobonds.

Money raised in the capital markets

Over the past five years, Ghana has raised a total of US$14.3 billion on the international Eurobond capital market.

This puts fee payments in the region of US$571-714 million. The fees are generally taken from the proceeds of the Eurobonds issued, which means that we pay coupons of approximately 8.5% on these amounts destined for the payments of the experts.

Maximizing the benefits of Eurobonds, Ghana’s debt to GDP ratio is approaching 80% and the country is mostly considered an over-indebted country.

On this premise, it will become difficult to access the international capital market, and any additional issuance of short-term Eurobonds will have a much higher cost.

It is therefore imperative to ensure that the maximum value is derived from any borrowing by the government on a future basis. To ensure that the correct benefits are obtained from bonds issued in the international market:

● It is essential to increase the correlation between Eurobonds and economic growth. The issuance of Eurobonds as a means of financing general fiscal gaps should be avoided. This will require realigning spending with tax revenue and improving domestic revenue mobilization

● Eurobonds should only be issued to fund specific investment projects with a rate of return above the cost of funding. This will ensure that investment proceeds can repay the principal and coupons of Eurobonds used to finance the projects.

● Eurobonds should be used to finance the most productive projects in sectors with the greatest impact on well-being and the ability to generate sufficient economic growth. The national railway network is a project that could be financed by Eurobonds.

● Ghana should only tap into the international capital market to raise funds during periods of low global interest rates. Proceeds from these transactions can then be used to pay off more expensive debts. Avoid taking on more expensive debt just to service existing debt

Chinese loans

Chinese loans China is playing an increasingly important role in financing major infrastructure projects across Africa, and Ghana is no exception.

As the world’s largest official creditor, China has been the largest bilateral lender to Africa in recent years, investing mainly in the energy, mining and transport sectors.

Available estimates from Johns Hopkin’s China-Africa Research Initiative (CARI) put China’s total lending to Ghana over the period 2000-2019 at $4.8 billion.

Around 47% of this amount was invested in the energy sector, with 18% and 15% respectively in the transport and communications sectors.

This amount excludes the US$2 billion loan agreement signed at the end of 2019 to be repaid with proceeds from the sale of refined bauxite (Benefo & Addaney, 2021).

The main concern with Chinese lending is commodity-related debt. About a third of Chinese loans are collateralized by export commodities in borrowing countries and tied to Chinese construction goods and services (Brautigam & Hwang, 2016).

Commodity-related debt increases debt sustainability risk, given the price uncertainties that characterize commodity trading in global markets (Ndikumana et al., 2020).