Former Finance Minister, Seth Terkper, has cautioned government on the need for a credible revenue and expenditure plan in order to avert defaulting on its debts, as the nation is currently challenged with roll-over risks of its debts.
Per government’s issuances calendar, cumulatively during 2021, a chunk of government issuances of about GH¢99.65 billion on the domestic debt market is to roll over maturing debts, which represents about 90.47 percent of the total issuance target for the year, leaving just about GH¢10.5 billion in fresh issuances to support the budget, equivalent to 9.53 percent of total issuance.
Speaking at the PFM Tax Africa Network media dialogue on Ghana’s finances, Mr. Terkper said: “We should take debt repayment seriously as we had in the sinking fund because that is what influences your yields. It is not mere refinancing without necessarily paying down. So, I think that is the lesson we have now; other than that, we have rollover risk.”
Rollover risk is associated with the refinancing of debt, which is commonly faced by countries and companies when a debt obligation, like a bond, is about to mature and needs to be converted, or rolled over, into new debt.
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This largely reflects economic conditions, such as liquidity and credit markets against a borrower’s financial condition. For instance, if interest rates have risen in the meantime, the country would have to refinance its debt at a higher rate and incur more interest charges in the future—or, in case of a bond issue, pay-out more in interest.
According to the Bank of Ghana, the country’s debt to gross domestic product (GDP) increased to 76.4 percent at GH¢335.9 billion, at the end of July 2021. Of the total debt stock, domestic debt was GH¢173.4 billion, equivalent to 39.5 percent of GDP, while the external debt was GH¢162.5 billion, representing 37.0 percent of GDP.
The Former Finance Minister emphasized that Ghana faces ‘rollover’ risk and could default. “Refinancing or borrowing for even a ‘century’ does not matter – if we do not have a plan for repaying debts. It is becoming increasingly difficult to go back to the markets, with yields performing badly and market players shedding Ghana’s bonds,” he said. “Rate of change of public debts shows a similar trend as of recent data on yields.”
Investor confidence has deteriorated in recent times due to elevated concerns over the nation’s sovereign fiscal and debt sustainability, which has resulted in the sudden tightening of the Eurobond market against Ghana.
This comes at a time when Ghana finds itself in a difficult position as external debt also has been rising sharply due to a number of sizable issuances in the international market, with more than US$11 billion raised between 2018 to 2021, pushing debt beyond the prudent threshold.
While Eurobond yields for most Sub-Saharan African countries remain close to their respective pre-pandemic levels, Ghana’s have sharply risen in recent weeks by around 250 to 300 basis points (bps), triggering sustainability concerns among investors.
