Former Finance Minister, Seth E. Terkper, has urged the nation to continue focusing on building the Sinking Fund with oil cash with a view to retiring maturing debts.
In his view, the Sinking Fund will help the economy reduce the debt stock, interest rates as well as improve overall yields and sovereign ratings. He therefore expressed his concerns that the Fund has been allowed to accumulate over US$800million since 2017 without utilization, as was the case in 2015 and 2016.
“We must continue to build the Sinking Fund from the additional crude oil and gas revenues from the Sankofa and Tweneboa Enyenra Ntomme (TEN) fields in order to make our economy’s fast-growing public debt more sustainable,” he said.
The Sinking Fund, which was established under Mr. Terkper’s reign as Finance Minister, requires the allocation of a percentage of oil revenue from the Stabilization Fund in order to retire the nation’s domestic and foreign bonds so as to avoid debt default or refinancing at high interest rate.
“Using a combination of measures such as refinancing (notably of the 2023 Bond) and soft amortization to extend tenor or maturity periods meant that by the end of 2016, we had projected that, we should be able to, on average, ‘buy-back’ up to three quarters of our foreign sovereign bonds from the Sinking Fund to ease the pressure on the debt stock,” he said.
He argued that there is sufficient legal backing for the measures under the Constitution, the Petroleum Revenue Management Act (PRMA) and the Public Financial Management Act (PFMA).
Speaking with the B&FT on a wide-range of issues regarding the development of new models of retiring the country’s external debt under his “smart borrowing” initiative, Mr. Terkper said: “Ghana appears to have had its back against the wall but we can point the right signals to the capital markets through these appropriate policies. The buyback and refinancing of Ghana’s first 2007 Sovereign Bond and, ultimately, the debt management provisions hold the key to making Ghana’s fast-growing public debt more sustainable.”
Explaining the essence of the implementation of the Sinking Fund under the past administration, Mr. Terkper said it was to ensure the retiring of maturing debts which were becoming a ‘headache’ because “we didn’t have a plan for retiring domestic and foreign bonds in the period before the new Debt Management measures.”
According to Mr. Terkper, the nation had used over US$350 million of oil proceeds from only the Jubilee Fields to retire its sovereign bonds.
Currently, according to the PRMA reports submitted to Parliament, the Sinking Fund has accrued about US$850 million due largely to the recent increase in crude oil prices as well as additional production of oil and gas from the Tweneboa Enyenra Ntomme (TEN) and Sankofa oil fields.
“If we had continued using our Sinking Fund alone, we would be able to reduce our external bonds or use it to complement our liability management strategy. My problem about not utilizing the Sinking Fund is that, we are holding US$850 million which we should have used to mitigate our external debt,” he said.
Mr. Terkper explained to the B&FT that the flows into the Sinking Fund and subsequent use of same to “buy-back” the sovereign bonds are based on capping the Stabilization Fund and channelling the annual excess flows into debt and contingency management, as required by the Petroleum Revenue Management Act (PRMA).
“The combined Sinking Fund and ‘Buy-Back’ programme means that Ghana was gradually lowering the ‘roll-over’ risk associated with its long-standing ‘interest-only’ loan payment policy for bills and bonds. The nation is on course to replace them with gradual redemption of the principal element of these so-called ‘bullet’ loans,” Mr. Terkper said.
He explained that the Stabilization Fund itself was set-up under the PRMA as a conditional or rules-based savings account to provide a buffer for the budget by minimizing the adverse impact of deficits on the economy.
According to Mr. Terkper, in the 2015 and 2016 financial years, as crude oil prices fell, the country tapped into this Stabilisation Fund and utilized over US$250million to augment budget revenues, adding that: “No matter the level of sacrifice that went into postponing consumption, especially the build-up that saw the Fund accumulating over US$500 million between late 2011 and 2014 during the crude oil price boom, this outcome justifies the precautionary steps that nations take to save for a ‘rainy day’.
Major measures used to pay down the 2017 and other Bonds
The country reached a major milestone on October 4, 2017 after using US$200 million of its own oil and gas resources from a Sinking Fund account as well as proceeds from previous Bond issues to “buyback” or redeem the last instalment of the first 10-year Sovereign Bond issued in 2007.
The decision to progressively retire the US$750 million bond before maturity—with a package of “buyback” and refinancing strategies—was taken in 2013, as part of the Home Grown policy. This Bond was also the first to be issued on a foreign capital market by a sub-Saharan African nation, besides South Africa.
Cabinet and Parliament approved the retirement of the 2007 Bond as part of the 2014 Budget to avoid retaining the full value to maturity in October 2017. Back then, Ghana faced significant “roll-over” risks since it did not set up a plan to repay the principal sum under the Bond’s half-yearly “interest-only” payment or “bullet” structure.
In the absence of a fiscal plan to create reserves to repay the principal sum when it fell due on October 4, 2017, investors expected Ghana to go to the markets to raise funds to refinance or roll-over the Bond at a punitive interest rate.
This was becoming difficult because of continuing fall in commodity prices, huge fiscal overruns from subsidies and wages, and stoppage of gas supply from Nigeria. The need for a progressive plan in the new Debt Management Strategy (DMS) to retire the Bond fully on due date became imperative.
Sinking Fund and Buyback:
The Sinking Fund flows used to retire part of the Bond was from oil revenues in the Stabilization Fund set up under the Petroleum Revenue Management Act (PRMA), (Amendment) 2015 (Act 893). Further, the October 4 final instalment was from a Sinking Fund transfer into a Debt Service Reserve (DSR) account for retiring Bonds to support debt repayment and improve yields.
Overall, Ghana had used US$336 million of the Sinking Fund by December 2016 to buyback the 2007 and other domestic and foreign debt.
Refinancing: Ghana also used US$100 million of the 2014 and US$216 million of the 2016 Bond proceeds to augment the retirement of the 2007 Bond, through a liability management or exchange plan for its new and old bonds. It is important to note that the bulk of the amount for overall domestic and foreign debt exchange and “buyback” came from the US$1billion worth of Bond that the World Bank guaranteed in 2015. ‘
Soft-amortization: At end-2016, Ghana’s last “bullet” was the 2013 Bond. Those of 2014 to 2016 fall under a soft-amortization plan–under which, instead of the 1-year “bullet” payment, the maturity periods were extended by 3-to-5 years. This is to enable Ghana redeem/buyback or refinance the principal sum gradually from the Sinking Fund.’
Hence, Ghana has been able to extend the maturity for the 2014 to 2016 bonds to 2030 and expects to cover 75 percent or more of the annual average obligation of US$300 million from the Sinking Fund and flows from commercial projects under the DSR’s “self-financing” plan.
Other Debt Management Policies
Mr. Terkper observed that the nation had averted the general notion that it would also had devoted proceeds from the oil resources to consumption only; learning from the advanced and middle-income countries, what also matters are effective debt management and a infrastructure development the latter through the setting up of the Ghana Infrastructure and Investment Fund (GIIF).
“We must augment the Sinking Fund with other measures, notably the ‘self-financing’ strategy that requires that we repay loans from the revenues generated by commercial projects and not put the burden on the taxpayer. We must establish the Debt Management Office (DMO) proposed in the PFMA to implement these proposals—to make our debt sustainable again,” he said.