Ghana’s “desperation to borrow” could drive away investors, says economist

The way Ghana handled its energy bond, which failed to raise the target amount despite extension, could suggest a state of desperation to borrow which may alienate investors, John Gatsi, an economist and senior lecturer at the University of Cape Coast, has said.

At the end of the extended period for the bonds backed by the Energy Sector Levy Act (ESLA), the government raised 4.71 billion Ghana cedis (1.06 billion U.S. Dollars), still short of a targeted 6 billion cedis.

“At the first closure date, we could not get our target; we extended for one week, yet we could still not get it. Now you have issued another statement that you will issue a three-year domestic bond. You are signaling desperation to borrow which by itself can also create a problem,” the economist told Xinhua in an interview late Wednesday at the end of a two-day seminar by Bank of Ghana and regional bank, ECOBANK.

The Ghanaian government is set to issue a three-year domestic U.S. Dollar Bond on Thursday in an amount yet to be specified which analysts believe is to compensate for the shortfall in the ESLA Bond.

Gatsi attributed the weak response to the bonds issuance to the lack of clarity in the process and the instrument.
Since the law says part of ESLA should be used to finance energy sector infrastructure, and part of it should be used to pay off energy sector debts, the investor will be interested in knowing whether the purpose of the government borrowing on the back of levy is in line with the law, according to him.

“If the investor has the feeling that part of the money will be used to pay off part of the debt and the rest will be used to finance other activities that are not captured in the Energy sector levy then that becomes a risky investment for the investor and the investor may advise himself,” Gatsi said.

Another point of lack of clarity he said is about the terminal point of the ESLA conflicting with the tenor of the bonds.

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“ESLA is not a levy forever so if the ESLA will end for example the next four years and you are issuing seven-year bond, a 10-year bond and a 15-year bond, the understanding is that you will be using the ESLA to be paying the coupon, but what happens after the exit period? Are you going to ask the people of Ghana to extend the sunset clause to cover the 15 year period?

“If that is not clear to the investor then the investor thinks that there is some risk element that he will not be able to accommodate, so the investor will be very selective in dealing with the bond that you are issuing,” he added.
Gatsi also attributed the low interest in the ESLA Backed bond to the associated political risk due to the way affairs are managed by the ruling class in Ghana.

If parties in power think only people who belong to their parties can hold public positions, that won’t help generate much interest in such long-dated instrument, according to him.

The economist said the situation where people who are closer to economic management of the country in recent times talk about revising all previous contracts and agreements also creates apprehension that should government change power again with a different party coming to power, a similar thing might be repeated.

“So anything happening in the economy sends signals as to how people should behave towards us when we need their assistance by buying into our bonds,” he said.