#MoneyReport2023: Exploring pension fund’s dynamics amid an alternative offer [DDEP 2]

Thomas Kwesi Esso, Executive Secretary, Chamber of Corporate Trustees

Amid increased scrutiny of Ghana’s financial sector, the Business and Financial Times (B&FT) delves into the latest developments in its recent publication, the Money Report 2023, focusing on the Domestic Debt Exchange Programme (DDEP). This initiative has become a central point of discussion, with the discourse exploring its impacts on the economy, investor confidence, and the sector’s trajectory.

The process began in the latter part of 2022 with the establishment of a consultative committee by the government. This committee engaged various financial market stakeholders to assess the potential impacts of restructuring and evaluate necessary adjustments.

In December 2022, the government proposed terms to bondholders, including pension fund schemes. However, the Chamber deemed these initial terms potentially harmful to pension fund contributors. This concern arose from the modest incomes of Ghanaian workers, whose pension contributions come from relatively smaller earnings allocated to Tier 2 and Tier 3 pension schemes.

In response, the Chamber, representing the industry’s interests, rejected the offer. Organised Labour also planned strike action, pressuring the government into discussions and ultimately leading to a Memorandum of Understanding (MoU). This MoU exempted pension funds from the DDEP, with the government, Organised Labour and relevant associations collaborating to resolve the impasse.

While banks and other bondholders embraced the revised DDEP, the interactions between the government and pension funds yielded positive outcomes. The objectives set were successfully achieved, reflecting the progress made and the process’ positive direction.

Interactions between the government and stakeholders have brought about a crucial juncture, providing pension funds with the chance to convert approximately GH¢31billion (US$2.7billion) from their existing investments into newly issued bonds that will mature in 2027 and 2028. These fresh bonds carry an average interest rate of 8.4 percent, a notable contrast to the prior average coupon rate of 18.5 percent.

Moreover, the government will enhance the offering to bond holders, who initially acquired these securities in February. This enhancement involves the allocation of a greater quantity of these securities along with an additional cash-payment instrument that yields 10 percent, thereby resulting in a cumulative stream of coupon payments amounting to 21 percent.

In an exclusive interview with the Chamber of Corporate Trustees – a key negotiator, the B&FT explores the alternative offer’s details and implications. The interview delves into the benefits the offer brings to pension schemes compared to the existing bonds, measures to ensure tradability and liquidity of the new bonds, and the Chamber’s role in achieving agreement with Organised Labour.

The Chamber’s insights also extend to broader challenges such as restoring confidence and market recovery. They discuss the impact of new financial products introduced by the Ghana Stock Exchange, like the Commercial Paper Market and Green Bond Issuance Guidelines, in rejuvenating investor confidence.

At this critical point, the interview provides a comprehensive view of the landscape, pointing to avenues for growth, resilience and investor trust restoration. This moment encapsulates a significant phase in Ghana’s financial history, offering insight into the evolving narrative.

  1. Can you provide a breakdown of the specific benefits that the new alternative offer from the Government of Ghana (GoG) brings to pension schemes in comparison to the existing bonds?

Our objective was to ensure that any offer brought to the table would meet three distinct objectives:

    1. First and foremost, we were determined not to accept any offer that would result in a loss of patrimonial value for pension funds. Our aim was to secure a deal that retained the value of the old bonds as it was initially.
    2. Secondly, we recognised the inherent uncertainty and risk associated with holding onto the old bond in its current form. The restructuring of bonds or implementation of a debt exchange programme often leads to the market favouring new bonds. To address this, we engaged in discussions to ensure that the new bonds would be tradable on the market. Given the operational nature of pension funds, they require liquidity at regular intervals. This liquidity is attained by trading bonds in the secondary market, allowing them to fulfil their cash flow requirements.
    3. Thirdly, liquidity was a significant concern. In this context, we sought assurances that the government would uphold the terms of the agreement. The new alternative offer stipulated semi-annual coupon payments, which align with the original arrangement of the old bonds. We aimed to secure a consistent flow of liquidity and ensure timely maturity payments. Pension fund administrators rely on these bonds’ coupon payments in their cash flow projections. Thus, the assurance of liquidity from the government was paramount. With these objectives in mind, we were confident in recommending our members to consider embracing the new alternative bonds.
  1. What specific measures have been put in place to ensure the tradability and liquidity of the new bonds offered in the exchange programme?

When the macro indicators started indicating a problem for the government regarding the financing of the old bonds, it led to a situation that prompted consultations by the Consultative Committee. During this time, the market responded to the information, with participants realising that the government was struggling to meet coupon payments on time, causing a risk-off sentiment in the market. Consequently, discounted trades emerged as the market reacted to the uncertainty and the ongoing discussions concerning the Debt Exchange Programme (DDEP).

Following multiple rounds of discussions and an analysis of the government’s offer and security, it became apparent that subscribing to the new bonds was a favourable option. This decision was influenced by the projection that the government would adhere to the terms of the new bonds, especially concerning the timely payment of coupons. This expectation acted as a potential catalyst for the market’s revival. Currently, the market experiences a downturn and reduced activity, largely due to the anticipation of the government’s behaviour when the coupons for the new bonds are due.

It is anticipated that trading will resume once the government successfully meets its obligations, starting with coupon payments. This positive turn of events is expected to reinvigorate the market and trading activities, as long as the government remains committed to fulfilling its obligations to bondholders. This assurance is what the market has been seeking, and there is a belief that the government will indeed uphold its end of the agreement, thus maintaining market vibrancy.

3. Could you elaborate on the role of the Chamber of Corporate Trustees in providing technical advice to reach a joint agreement with Organised Labour? How did this collaboration impact the decision to allow pension fund schemes to participate in the offer?

In this restructuring effort, the government aimed to consolidate more than 65 bonds into two, while upholding our primary goal of retaining the patrimonial value of our existing bonds. Therefore, there has been no reduction in the value of pension fund bonds – no haircut has been applied.

Both Organised Labour and the Chamber of Corporate Trustees engaged in separate discussions with the government. Guided by our technical team, the Chamber’s discussions aimed to ensure the realisation of our stated objectives. Similarly, Organised Labour conducted their own negotiations. The convergence between the two discussions occurred when the government formally presented its position to us.

Subsequently, our discussions centred on ensuring that both parties could confidently accept the proposal, aligning with our objectives. It’s essential to acknowledge that members of Organised Labour have contributions within pension funds, regardless of the sector.

As the Chamber, we engaged in a dialogue with Organised Labour regarding the terms of the new offer presented by the government. Our discussions led to the agreement that this new alternative offer indeed aligns with the objectives we had set. If you examine the statement issued by Organised Labour following the announcement of the Alternative Offer, they also affirmed that the offer fulfils their objectives: preserving the patrimonial value of the funds, ensuring tradability, and maintaining liquidity. These objectives were ones that both parties committed to achieving. Consequently, I believe that we have effectively accomplished our targets.

Let me take this opportunity to encourage all pension fund schemes either Corporate Trustees or Stand-alone schemes to participate in the new alternative offer, since it improves on the value of the eligible bonds which imparts positively on the benefits of all pension fund contributors.”

4. In the context of recent risk-off sentiments and lowered bond prices in the secondary market, how do you foresee the acceptance of this exchange offer affecting investor confidence in Ghana’s financial sector?

In the context of recent risk-off sentiments and lowered bond prices in the secondary market, I believe that all of us now have a certain level of confidence. We believe that if the domestic debt exchange programme (DDEP) is concluded, it will help the market rebound. Now, with where we are, everything depends on the government’s efforts to ensure this rebound. If the government fulfils its obligations in terms of periodic coupons and maturities, investors will gain confidence in holding government bonds, assured that the government won’t default.

The problem and reason for low investor confidence in government bonds for greater part of last year, stemmed from the fear that the government wouldn’t meet its obligations. At one point, the government wasn’t even paying coupons, further eroding investor confidence. Thus, the key lies in the government starting to meet its obligations, including paying coupons on the bonds it has issued. This will contribute to rebuilding investor confidence.

This rebuilding of confidence is vital, especially in the current environment marked by risk-off sentiment and lower bond prices in the secondary market. The acceptance of the exchange offer holds the potential to restore trust in Ghana’s financial sector and generate a more positive sentiment among investors.

5. From your expert perspective, how can we effectively restore confidence and facilitate market recovery considering the existing diminished level of confidence?

In our fixed income market, government dominance is quite prevalent. This indicates that corporate debts are limited. Confidence will be restored if government obligations are met regularly. People have confidence in government securities because when they purchase bonds, they expect coupon payments and timely settlements. This cycle enhances confidence.

The government holds a significant responsibility to ensure both positive actions and inactions, fostering confidence. Additionally, focusing on equity markets can contribute to overall confidence. Observing the equity market’s performance can lead to a collective positive sentiment. Aligning the equity and fixed income markets can prompt individuals to diversify their investments and take advantage of market opportunities.

By promoting both markets simultaneously and deepening the investment landscape, the dependency on government bonds can reduce. If the private sector thrives in both equity and fixed income markets, government intervention becomes less crucial.

Strategies to heavily engage in both markets can instill sustainable confidence. By participating in both sectors, investors can benefit from market dynamics. This balanced approach can lead to sustainable confidence in the financial sector. So, it’s crucial to ensure the proper alignment of both equity and fixed income markets to maximize market advantages and instill a sense of confidence. This calls for investment instruments that strongly compete with government instruments.

6. In your professional perspective, how important are the new products, such as the commercial paper market and guidelines for green bonds issuance, being introduced by the Ghana Stock Exchange to the market? How does this impact restoring confidence and facilitating market recovery, considering the existing diminished level of confidence?

The introduction of these new products is highly significant as they contribute to the expansion of asset classes and investment opportunities in the market. With the introduction of options like commercial paper, commercial production chains, ripple, erics, and more, investors now have a wider range of choices. This diversification in investment classes promotes healthy competition among these classes, offering investors multiple avenues for their investments. This, in turn, creates a balanced investment ecosystem and prevents any one investment, such as government bonds, from dominating the market.

Having a variety of investment products, including green bonds, ensures that investors are not restricted to a single option but have numerous opportunities to diversify their portfolios. This diversification can help mitigate risks associated with certain investment classes, like government bonds, and allows investors to adapt their choices based on the risk profile and economic conditions.

Furthermore, the involvement of the private sector in this initiative is crucial. As different investment classes compete for attention and funding, the market becomes more resilient and responsive to changing economic dynamics. Private sector participation adds depth and dynamism to the market, contributing to its overall health.

To maintain this momentum and promote a vibrant investment landscape, it’s vital that regulatory bodies – such as the Ghana Stock Exchange, the Security and Exchange Commission, and other relevant institutions – continue to endorse and approve new investment products. This approach not only enriches the market, but also empowers investors with a broader spectrum of choices that align with their risk tolerance and investment goals.

In essence, the introduction of new investment products nurtures market diversity, encourages competition, and empowers investors to make informed decisions that align with market trends and economic conditions, ultimately playing a pivotal role in restoring confidence and fostering market recovery.

7. In your professional perspective, considering the level of inflation and the monetary policy rate, is the promised interest rate reset on the market achievable through the domestic debt exchange programme (DDEP) as claimed by the government?

If we analyse the other parameters such as inflation and policy rates, even examining the interest rates that treasuries are currently fetching in the market, we begin to question the feasibility of achieving an interest rate reset. It’s worth noting that many benchmarks for setting interest rates are often tied to government rates. For instance, the interest rates the Government of Ghana is paying on various bonds, like two-year or five-year bonds, act as a reference for determining interest rates across the board. This government interest rate essentially becomes the reference point.

However, it’s important not to overlook the fact that as an investor, you’re also considering inflation rate. If the inflation rate is at a substantial figure, such as 40 percent to 45 percent, it means that before you even commit to an investment, you’ve already lost a significant portion of your real investment value due to inflation’s impact on returns. This in itself poses a challenge. Still, the government claims that with the successful conclusion of the debt exchange programme (DDEP), the resetting of interest and inflation rates will materialise.

We are hopeful that when the DDEP is completed in its entirety, the interest rate reset will indeed be a focus. We can assume that the aim is to ensure a coherent resetting of rates. This process should align with the interests of the government, the Ghana Stock Exchange, the Securities and Exchange Commission, and even the banking sector.

A synchronised approach is needed to avoid unnecessary complications. This alignment would not only restore investor confidence, but also foster a conducive environment for businesses. It’s important to streamline the various rates – be they treasury rates, inflation rates, or the rates tied to newborns and their coupons. All these elements should ideally follow their natural trajectories to simplify pricing strategies for various financial instruments.

In conclusion, achieving this synchronisation is not only in the interest of the various stakeholders, but also in the best interest of Ghana’s financial ecosystem. It will contribute to stability and predictability, and ultimately bolster confidence in the market, streamlining business operations and investment decisions.

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