The Ghana EUROBOND: The facts and analysis behind the figures

The Ghana EUROBOND funding efforts are over and Ghana has bagged $3 billion. This was followed by Ghana celebratng a successful $3 billion EUROBOND with a Kenkey party led by the Minister of finance and the Ministry of finance but, hold on, the government may be hiding some very important facts on how as a country we are going to pay the bond and how much we are going to pay back as nation as interest. Ghana will pay an estimated interest of $2 billion on the Eurobond. Read on for the explanations. Ghana beyond Aid or mediocrity, Kenkey Party, is Ghana serious?

A bond is a debt instrument used to raise capital by corporate organizations and governments and the bond issuer (Government) in this instance raises the needed capital from an investor which makes the government obliged to pay back a specified amount at a future date plus interest at agreed times.

Ghana has sold bonds to the sum of $3b in three (3) different tranches which are expected to mature in 7, 12 and 31years at varied interest rates of 7.875% / 8.125% and 8.95% respectively.

In raising funds via loans, one ought to very often pay back the principal and the associated interest which reduces the amount you owe gradually however, bonds are not treated in this form. for bonds, one must continue to pay the interest as and when they fall due then on the agreed day of final settlement, you pay back the entire principal (face value) on the maturity date.

And so, the Eurobond of today is on the head of the young today whether government uses the funds properly or not.

Assumptions of interest payments on Eurobond

Have you thought of how much Ghana will pay in all for the various rates quoted above?

Given the current market rate of 0.016% for a similar bond, a bond with a face value of $1,000,000,000.00 and paying a coupon rate of 7.875% (compounding annually), should be selling for $1,549,778,085.73 (selling at a premium). Thus each year, Ghana will pay an interest of $78,539,726.5329. In the 7^th year, the face value of $1billion will be paid.  

Given the current market rate of 0.016% for a similar bond, a bond with a face value of $1,000,000,000.00 and paying a coupon rate of 8.125% (compounding annually), should be selling for $1,972,068,751.98 (selling at a premium). $81,005,729.3317 will be paid yearly for 12 years as interest followed by the payment of the $1billion in the 12 year.

Lastly, Given the current market rate of 0.016% for a similar bond, a bond with a face value of $1,000,000,000.00 and paying a coupon rate of 8.950% (compounding annually), should be selling for $3,762,462,439.09 (selling at a premium). $24,595,562.5513 will be paid by government yearly for 31 years as interest followed by the payment of the $1billion in the 31^st  year.

In all, Ghana will be paying an estimated interest of $762,462,439.09 + $549,778,085.73 +$762,462,439.09 which adds up to $2billion plus the face value of $3 billion. An estimated total of $5 billion will be paid by Ghana which gives us a total interest of nearly 60% over the period of payment.

Ghana’s Eurobond was overly subscribed probably because our bond was cheap and investors as rational beings prepared to put their money where it is safe and gives the best returns.

Why did Ghana go for the Eurobond?

The reality is that, as a country, our budget is always in deficit which means our budgeted expenditure as a country is higher than our income hence there is the need to raise additional funding to shore off the difference and help government realize its objectives. If this is one of the reasons for the Eurobond, the question is, how much of the $3billion will be expended this year? Have we raised so much more than we need for this year as a country?

If we fail to use the $3biliion for serous investment purposes to improve the economy and make it more productive, we may keep borrowing to pay for our debts instead of earning decent returns to pay back the bond. Newsghana24 has heard that, one of the reasons for the Eurobond is to help pay off some outstanding bonds government secured in the past.   

Ghana’s total debt as far as bonds are concerned has now shot up to $16b being the sum of the $13billion sovereign bonds and the new Eurobond of $3 billion.

The Way forward for Ghana after the Eurobond

We must get value for money from these huge capital we are raising as a country, which if used judiciously should boost the economy, expand infrastructure, and help create a diversified economy. Industrialization which is one of the key strategies of the Nana Addo lead government must be achieved to further strengthen the economy and expand our export base as a country.

Every portion of the $16billion that we use to support spending that does not lead to expansion of the Ghanaian economy will amount to waste of resources, misplaced priorities and the placement of unnecessary hardship on the citizenry.

This is not the time to organize kenkey parties because we have raised $3 billion long term debt but a time to begin critical thinking of how the application of these funds will help improve the Ghanaian economy and make the citizens feel an improvement in their lives.

Investments in projects saddled with corruption within the political elite, business and government agencies will further impede our efforts and the $3 billion Eurobond and reduce the resource available for investment and development. If we don’t get it right as a nation, we may plunge our dear Ghana into a vicious cycle of indebtedness. Ghana must be responsible now. At 62, let us show that we have come of age and show the way by using this $3 billion Eurobond judiciously.