The Government of Ghana announced on December 5, 2022 a Domestic Debt Exchange (DDE) of approximately GH¢137.3billion in principal amount of certain bond holders of E.S.L.A. Plc. or Daakye Trust Plc. to exchange their Eligible Bonds for a package of new bonds to be issued by the government as part of its efforts to address the country’s ongoing economic crisis. The government has extended the deadline for voluntary participation in the Debt Exchange Programme from December 30, 2022 to January 16, 2023. The exchange is a government-led debt restructuring policy. It should be noted that the government has been hit by a massive economic downturn characterised by high interest rates, soaring inflation, record-breaking cedi depreciation, and multiple credit downgrades of the economy.
This programme was introduced with the expectation that it would significantly reduce the burden of interest payments on the Ghanaian government, and save approximately US$1.2billion in interest between 2023 and 2028, or 7 percent to 8 percent of the country’s GDP. If the debt exchange is successful, the Government of Ghana will gain significant fiscal space while local bondholders will suffer significant losses on their investment in government domestic bonds and notes.
New terms of debt exchange programme
The government announced the following modifications to the Invitation to Exchange, which are set forth:
- Offering accrued and unpaid interest on Eligible Bonds, and a cash tender fee payment to holders of Eligible Bonds maturing in 2023;
- Increasing the New Bonds offered by adding eight new instruments to the composition of the New Bonds, for a total of 12 New Bonds, one maturing each year – starting January 2027 and ending January 2038;
- Modifying the Exchange Consideration Ratios for each New Bond. The Exchange Consideration Ratio applicable to Eligible Bonds maturing in 2023 will be different to other Eligible Bonds;
- Setting a non-binding target minimum level of overall participation of 80 percent of aggregate principal amount outstanding of Eligible Bonds; and
- Expanding the type of investors that can participate in the Exchange to now include Individual Investors.
Impact on individual investors
The investing community, the mostly average Ghanaian, has raised concerns upon hearing this news of restructuring debts owed them by government. Many people have indicated that this news will worsen their living conditions because they use these coupon payments to pay for expenses such as daily living cost, rent, school fees and a host of others. Again, a good number of investors in government bonds are pensioners who have invested their pension payouts as a way to receive a periodic stream of income while on retirement. Others who require their investment for any profitable project will be impacted as well since they will be unable to do so at this time. Holders of bonds maturing in 2023 will receive coupons starting from 2027 to 2033 while those with bonds maturing in 2024 will receive coupons starting from 2027 to 2038.
Imagine a 62-year-old pensioner who owns a Government of Ghana (GOG) bond, and will receive its full principal in 12 years. My question is, what happens to this pensioner if he/she dies before the 12-year period is up? This is the reality for many Ghanaians who have purchased GOG bonds. Many of these bondholders will suffer from depression and die prematurely as a result of this situation.
Impact on businesses
Companies that purchased bonds to fund future business expansion with principal payments will be unable to do so from now (2023) until 2027 because they will not be paid (except coupon payments) according to the terms of their bond. As a result, businesses will miss out on much-needed capital injections to help them expand. This is likely to have an impact on productivity and, to a greater extent, lead to staff lay-offs because if a company is unable to meet its economic obligations or perform at its usual optimal level, the easiest way out is lay-offs.
Impact on financial institutions
The financial sector, which includes stakeholders – such as local banks – would be greatly impacted by the implementation of this domestic debt exchange, owing to excessive exposure to government-issued bonds. Bank capital reserves would be severely depleted, resulting in liquidity shortages and, in the long run, financial instability in the economy.
The depreciation of their restructured assets, such as government bonds, may cause the asset side of banks’ balance sheets to suffer a direct hit. On the liability side, banks may face deposit withdrawals and the interruption of interbank credit lines. These issues may jeopardise their ability to mobilise resources.
The government needs to be more transparent about the bondholders’ choices if they choose not to accept the DDE. As it stands, the exchange document is not clear on what happens if a bondholder refuses the exchange. The government should also give bondholders an opportunity to discuss and bargain the offered terms since, in my opinion, doing so will result in a fair resolution moving forward. Also, government needs to assume more burden in resolving the current economic situation. The just passed budget still has line items that can be shelved – for now – to create fiscal space to either continue paying investors their coupons and principals, or reduce the impact of the exchange programme with favourable terms.
Additionally, I advise the government to immediately halt the Domestic Debt Exchange Programme and promote greater stakeholder involvement.
Emmanuel is the Policy Analyst & Executive Director, Movement for Responsible & Accountable Governance (MoRAG)
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