Government proposes alternative offer for Pension Funds to address cash constraints
Ghana’s government has proposed an alternative offer for pension funds in the country as it looks to alleviate its cash constraints over the coming years. The move comes after a Memorandum of Understanding (MoU) was signed between Organised Labour Associations and the Government on December 22, 2022, to exclude pension funds from the Domestic Debt Exchange Programme launched on December 5, 2022. The parties agreed to work towards a mutually beneficial solution that would be consistent with Ghana’s Debt Sustainability Analysis.
The proposed offer, which has been carefully crafted to address the Government’s financial needs while maintaining the value of the pension funds, entails exchanging current holdings of Treasury Bonds, ESLA Bonds, and Daakye Bonds for a menu of the currently outstanding New Bonds. These bonds were issued in February 2023 and are set to mature in 2027 and 2028, respectively. The New Bond 2027 and New Bond 2028 feature an average coupon of 8.4%, with a ratio of 1.15x that will result in an increase in patrimonial value. An additional cash payment instrument of 1000 (“Strip Coupon”) will also be included.
The stream of coupons received as part of the proposed offer will be 21% compared to the current 18.5% of the outstanding old bonds. In 2023 and 2024, both instruments will pay 5% coupon in cash, and the remainder will be capitalized into the nominal amount of the two bonds to comply with the cash constraints and the macro-framework defined under the programme with the International Monetary Fund (IMF).
The alternative offer has been designed to achieve the same average maturity as Pension Funds’ current holdings of old bonds, which are currently between four and five years. It also aims to achieve a similar average coupon, which is currently at c. 18.5%, while alleviating the cash constraint for the government over the first 10 years. Overall, the offer preserves the Net Present Value of Pension Funds’ current holdings of old bonds at a 21% discount factor.
The government believes that there is value for Pension Funds to participate in this alternative proposed offer. The New Bonds are expected to be more liquid than the old bonds, considering the larger investment base and the benchmark size of the New Bonds. The investor base on the New Bonds will be further developed going forward, as the government is expected to finance itself by reopening these New Bonds in order to sustain benchmark size bonds that are well spread in terms of maturity. This is why the government believes that these bonds are expected to be more liquid and have a higher market value than the old bonds.
The proposal is a strategic move by the government to address its cash constraints and achieve fiscal sustainability while ensuring that the Pension Funds are fully compensated for the value of their current holdings. The offer is expected to help maintain Ghana’s Debt Sustainability Analysis and support the country’s economic growth over the long term.
The proposed alternative offer for Pension Funds in Ghana is a carefully crafted proposal that aims to address the Government’s financial needs while maintaining the value of the Pension Funds. The government believes that the offer is mutually beneficial for both parties and will help to achieve fiscal sustainability and economic growth in Ghana.
