Former finance minister Seth Terkper said the government had cut its borrowing rate on the external market because of difficulties it might face in obtaining loans.
According to Terpker, confidence in Ghana’s ability to repay the loans it takes out is being lost due to the country’s inability to honor previous loans.
That, he said, led Bloomberg to warn the government that it is sinking deeper into troubled territory as investors judge refinancing debt in the Eurobond market will not be an option. option when the Federal Reserve raises rates and fiscal targets remain elusive.
speaking on Newsfile from JoyNews On Saturday, Mr. Terkper explained: “You borrow. Is your market able to give you the money you need? Your market is small. If you look at the budget, the financing system, you will see that the rate at which we borrow, the government itself has lowered it. The government therefore expects it to have difficulty going to the foreign market.
Bloomberg warns us that aside from the difficulty you are having now, we all know that we use all of our tax revenue to essentially pay compensation, the interest on previous loans. This means that the loan that we borrowed previously, we borrow to refinance. »
He added: “Because our situation was deteriorating, that’s how the markets interpret it, they think you’re struggling to pay.”
For him, this confirms why “the government did not go to the market for the extra 2 billion last year. We were supposed to borrow 5 billion.
Mr. Terkper cited the zero coupon bond taken by Ghana to further explain. According to him, although the move was described as “innovative”, the “cost was high”.
“For 500 million that we were supposed to receive, we only received 350 million in advance. Which means we gave 150 million,” he said.
A zero-coupon bond, also known as a regularization bond, is a debt security that does not pay interest but instead trades at a steep discount, earning a profit at maturity, when the bond is redeemed at its full nominal value.
His comment comes after international ratings agency Fitch downgraded Ghana’s Long-Term Currency Issuers (IDR) default rating to “B-” from “B” with a negative outlook.
Fitch, in a report, said that “this comes against a backdrop of uncertainty about the government’s ability to stabilize debt and against a backdrop of tightening global financing conditions. In our view, Ghana’s ability to achieve planned fiscal consolidation efforts could be hampered by increased reliance on domestic debt issuance with higher interest costs, in the context of an expenditure ratio of already exceptionally high interest/revenue.
The Practical Mechanisms of a Zero Coupon Bond
Assuming Ghana issues a $500 million zero-coupon bond at a discounted rate of 20% ($100 million), Ghana will receive $400 million in cash today, but repay $500 million when the bond will mature in 4 years.
In the meantime, however, Ghana will pay no interest over the 4 years. This means that the government can use the money it would have used to pay interest over the next 4 years for something else. In the case of Ghana, for this bond, the government has indicated its intention to use the proceeds to refinance more expensive domestic debt attracting 19% interest.
Thus, Ghana borrows without interest and uses the proceeds to pay off existing debt with higher/expensive interest rates.