August 13, 2021/CSL Research

In recent weeks, investors have continued to show apathy towards Ghana’s hard currency bonds, as the spread is relatively wider than those of its peers. For context, the Eurobond yield spread between Ghana ’49 and Nigeria ’47 is estimated at 160bps, 1.2x higher than the spread at the start of the year. In our view, there are two plausible reasons for this: (1) poor fiscal metrics and (2) investors’ anticipation of hard currency bond issuances in other African countries like Nigeria and Côte d’Ivoire.

In our view, the fiscal metrics in Ghana remains a major concern for investors. Recently Fitch Ratings revised the Outlook on Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable, indicating deterioration in public finances stemming from the Covid-19 pandemic and the delays to the government’s fiscal consolidation efforts.

These factors are believed to reduce Ghana’s ability to absorb further shocks. Further exacerbating Ghana’s fiscal risks is the energy sector’s restructuring cost, which includes the
clearing of US$1bn in debt to independent power producers and deals made with powergeneration companies, which could save up to US$5bn. However, additional liabilities of
about US$10-US$12bn could fall on the government if such restructuring efforts fail. As such, the fiscal deficit (cash basis) is projected to reach 8.3% of GDP in 2022, higher than the psychological level of 5%.

In comparison to Ghana’s fiscal metrics, we highlight that Nigeria has a low to moderate risk of. fiscal distress due to a low public debt-to-GDP ratio of 35.5% of GDP – Ghana (84.4% of GDP) and Kenya (70.4% of GDP) – and low foreign-currency (FYC) indebtedness. Nevertheless, high interest payments will continue to absorb a significant portion of Federal Government revenues, making the low debt-to-GDP ratio highly vulnerable to shocks.

That said, we believe foreign investors will show interest in the proposed Eurobond by Nigeria. We believe the bond will be well subscribed, supported by (1) elevated global value of negative-yielding bonds, which is estimated at US$14.5tn, (2) high global liquidity, as most global central bankers are either retaining interest rates or remaining dovish. Also, the Eurobonds issued in Africa this year have had a cumulative oversubscription of 2.0x. This indicates that offshore interest remains high, and Nigeria will likely not be an exception.