"Footing Ghana\u2019s election bill means cycle of higher borrowing"

" \n The paradox of democracy is that while investing in African dictatorships brings reputational risks for Western financial institutions, competitive democracy comes at a high cost. \n \n\n \n Ghana\u2019s recent polls show the need for governments to bolster popular support through public spending and loose fiscal policy in the run-up to an election. That runs counter to the requirements of international debt markets. \n \n\n \n Elections in Ghana have become\u00a0the most competitive in Africa, REDD Intelligence argues in research published in December. The winning margin in presidential elections fell from 28 points in 1992 to 0.4 points in 2008 and 3 points in 2012. This has meant greater pressure on incumbent parties to increase public spending in the run-up to polls, says REDD Intelligence. \n \n\n \n Competitive elections are a \u201cmajor factor\u201d in debt sustainability, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. \u201cAfrica is becoming more democratic, but the downside is that parties in power will spend more\u201d to stay there. \u201cThe political imperative is to spend.\u201d \n \n\n \n The country\u2019s\u00a0 electoral commission declared incumbent Nana Akufo-Addo \u00a0the winner of this month\u2019s presidential election. \n \n\n \n His opponent, John Mahama, who was president from 2011 to 2016, has rejected the verdict, claiming electoral manipulation. \n \n\n \n Ghana\u2019s rising government debt \n \n\n \n The IMF forecast in October that Ghana\u2019s\u00a0government debt will rise to 76.7% of GDP in 2020, having stood at 59.1% in 2018. \n \n\n \n Part of that is due to a clean-up of the banking sector, but PwC Ghana estimates that the exercise accounted for only about three percentage points.Africa InsightWake up to the essential with the Editor's picks. Sign upAlso receive offers from The Africa ReportAlso receive offers from The Africa Report's partners \n \n\n \n Even in the immediate post-election year of 2021, the IMF predicts that debt will only decline marginally to 74.7% of GDP. \n \n\n \n Charles Robertson at Renaissance Capital estimates that Ghana\u2019s\u00a0interest payments as a percentage of government revenues, at 50%, will be the highest in Africa this year, above even Zambia. \u201cWe should be more worried than we have been\u201d about Ghana, he wrote in November. \n \n\n \n Ghana is the riskiest African debt that Renaissance says investors should consider, so long as it is balanced by safer bets such as Egypt and Kenya. \n \n\n \n Eurobond sale \n \n\n \n According to research from REDD Intelligence in December, Ghana is likely to return to the eurobond market in the first quarter of 2021, though the risk premium demanded by investors is likely to increase. Bohlund expects Ghana to be able to raise about $3bn. There\u2019s a \u201clot of goodwill\u201d towards Ghana among emerging-market bond investors, he says. \n \n\n \n \u201cInvestors tend to have a rose-tinted view of Ghana,\u201d says Bohlund. This, he argues is based on external debt metrics which appear benign. More importantly, Bohlund says, is the country\u2019s domestic debt. \n \n\n \n The\u00a0lack of yield on offer globally\u00a0means that some investors will still be drawn to Ghanaian debt, adds Bohlund. Selling eurobonds which may yield about 8% to 10% offers Ghana a\u00a0cheap way to pay down domestic debt\u00a0which costs about 20%. \n \n\n \n But it\u2019s \u201cna\u00efve\u201d to assume that Ghana won\u2019t\u00a0revert to new domestic borrowing\u00a0after a eurobond sale, he says. \u00a0Foreign lenders \u201cdon\u2019t get to vote in elections\u201d so they will be down the list of priorities of the new government. \n \n\n \n Neither does increased borrowing from China, even if the money were available, provide a way out. \n \n\n \n Loans from China to African governments are typically tied to an infrastructure project. They don\u2019t create liquidity or financial flexibility. \n \n\n \n That doesn\u2019t bode well for Ghana\u2019s finances in the long term. \u201cIf you\u2019re struggling with debt, you shouldn\u2019t be taking on more debt,\u201d says Bohlund. \n \n\n \n Bohlund sees the risks of debt restructuring in Ghana as likely to increase in 2024 when the next new government is due to be chosen. \n \n\n \n Bottom line \n \n\n \n Western investors stuck for yield have yet to come to terms with the trade-off between competitive Africa elections and higher public spending. \n "

"Footing Ghana\u2019s election bill means cycle of higher borrowing"

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