DISCLAIMER: Dr. Jerry Monfant is a Chief Economist and currently serves on the Financial Institutions Advisory Panel and sector-specific Standards in the EU. The views expressed in this article are entirely his personal views and do not reflect those of his organization or its affiliates. The write-up is purely for economic education.
As a player in the financial industry, I took a key interest in Ghana’s default in servicing its external debts, and the subsequent ongoing restructuring exercise with the country’s external bondholders.
In April this year, I read a gloomy story on Ghana’s economy in one of the European Economic news feeds. The discussion was centered on the collapse of the negotiations with the London Club (individual Eurobond holders represented by two groups led by Fund Managers and Hedge Fund companies) and also some continental African Banks. The negotiations represented $13 billion out of $30 billion in external debt.
At that time, Ghana proposed a 33 percent haircut OR to keep the current face value but extend the maturity date to 2043 at a reduced coupon rate of 1.5 percent. This arrangement was rejected by the African Regional Banks. From a financial analytical perspective, something unusual happened. The IMF upon delving into the Ghanaian proposals realized that both proposals were not feasible! And that Ghana could not still sustain its debt even if the negotiation had sailed through. This begs more questions!
Who are the members of the Ghanaian restructuring team?
Which financial cash flow assumptions were used to arrive at such an embarrassing debt settlement analogy?
On 21st June 2024, the World Report news portal reported that Ghana reached a deal in principle with bondholders on $ 13 billion debt and this news was attributed to Reuters. Under the new deal, the bondholders will take a haircut on the principal of up to 37 percent, and the maturity of the bond is lengthened. The details of this arrangement, especially the extended maturity dates, are not mentioned. The report further highlighted the underlying danger going into the restructuring, and that is a high bond value spread! According to the report, the Ghana dollar bond rallied with the 2027 bond rising to its highest price since 2022. (For nonfinancial experts, the price of a bond is always determined according to the bond risk premia). This is a tail sign of the most difficult time to come.
What happens next and what are the consequences Ghana faces going forward with its economic recovery program?
The first question Ghanaians should ask the restructuring team is what haircut model was used to estimate the current haircut of 37 percent? What are the implications of using such a model for a country almost buried in debt with exacerbated currency depreciation and muffled inflation figures?
There are two sets of haircut estimates. The one popularly used by most market participants is called the “Market Haircut.” HM. The other haircut model which is the most refined and better approach for countries going through perennial debt challenges such as Ghana should have and must have adapted to is the “STURZENEGGER AND ZETTLEMEYER” HSZ Haircut approach. This model has been used rigorously by 22 countries across the globe that has recently gone through restructuring. From what I see, Ghana, unfortunately, adopted the market approach instead of HSZ. The Market Approach has the ramifications of future default, and this will not be the first time Ghana may likely seek restructuring or default! This poses a danger to future governments and national debt management.
What are the differences between the two restructuring approaches? Under the Market approach, unmatured old debt instruments are not taken at face value but computed in Present Value terms and discounted at the same rate as the new debt instruments. Both approaches use the face value of that old debt including past-due interest. However, the HSZ approach would disregard penalties!
The penalties and accrued interest plus extended period cost could render the haircut ineffective. Moreover, the HSZ method could have added the unmatured bonds of the remaining $17 billion and discounted it as part of the total restructuring package. Interestingly, the three largest restructurings of recent years (Argentina, 2005, Russia, 2000, and Iraq, 2006 all implied haircuts of more than 50 percent!
Ghana should not fall into the trap of Peru’s restructuring of 1983, which was seen as the most wasted effort and incomplete, because the Country continued to accumulate arrears until it finally resolved its debt crisis with a Brady deal in 1997. Similarly, Russia fell into the same trap during the restructuring of its Soviet-era debt as a final deal, and later, had to restructure the same debt only three years later.
POST-RESTRUCTURING ECONOMIC DANGERS.
While some Ghanaian citizens could heave a sigh of relief that the country’s debt is close to being restructured, I wish to burst your bubble; that this is the beginning of the economic troubles of the country. Currency depreciation will be the top-most threat, leading the gang with high inflation as the country relies heavily on imported external goods. One of the major reasons Ghana could face such an unprecedented challenge is the previous adaptation of the knee-jerk model of borrowing from the Capital Market to pay off maturing debt, thereby running an unsustainable spin cycle!
This system afforded Ghana a temporary relief to use its forex revenue to support the importation of essential goods, though as wobble as it was!
NOW, THE TAP HAS STOPPED RUNNING! HOW LONG IS GHANA GOING TO BE OUT OF THE CAPITAL MARKET???
Studies within the market over a long period have established that the average duration from restructuring to partial re-access of the Capital Market is 5.1 years. Exclusion from the Capital Market also increases according to the haircut size. Haircut size under the HSZ approach has established that haircuts greater than 30 percent could push Ghana out of the Capital Market for well over 6.1 years!
Matters could also worsen for Ghana’s re-entry into the Capital Market in the future if the Country’s debt-to-GDP ratio and fiscal balance coefficient appear to be negative. This could extend the country’s ability to re-access the Market far longer than the 6.1 years as stated earlier.
Other variables such as political risk, annual inflation, growth, or the ratio of reserves to import are insignificant to apiece the market!
Winning power in 2024 is very crucial at the moment, as the country is geared towards an election at the end of the first week in December, but the forecast dangers relating to economic management after the assumption of office in 2025 without clear economic pathways could throw the government off balance.
The key interest amongst political parties should be to develop a new set of economic tools far ahead before the assumption of power! I’m not talking about manifestos, I’m referring to a technical work plan using all manner of sensitivity analysis, as the first six months could be very crucial in determining the economic stability of the country moving forward. The urgency and the choices made in the first year could determine economic stability in the subsequent years.
The future government would have to abandon fiscal dominance, which appears to be a colonial model of the country’s economic management system, and embrace more modern monetary tools as a shifting gear to achieve its economic independence.
I would highly recommend that current debt restructuring should involve the opposition parties and their technical team if they are not part of the restructuring negotiation team. I foresee another default and another restructuring shortly if the current restructuring deal is sustained! I also envision economic difficult times ahead if the immature and unstructured debt of 17 billion dollars including the residual value of $13 billion if things remain the same. Subsequent government borrowing could prove debt sustainability challenging!
The question the country should ask is what happens after the last tranche of the IMF program funding dries up in the half quarter of 2025, and the Capital Market fully shuts up in the face of Ghana’s dwindling export earnings as a result of a hostile economic environment experienced in the few last years?
Your guess is as good as mine!
