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Reuters: Ghana pays a premium as it raises $750 million in 10-year Eurobond
Posted on: 26-Jul-2013         Source: Reuters
Ghana sold a $750 million Eurobond on Thursday in its second foray into international bond markets, but paid a premium to compensate investors wary about its burgeoning fiscal and current account deficits.

The West African cocoa and gold producer, which discovered oil in 2007, issued the 10-year bond at a yield of 8 percent, sources told Reuters. The order book was around $2 billion, just over two and a half times the issue size, the sources said.

With an economy set to grow by 8 percent this year and a record of political stability, Ghana is well liked by foreign investors, who are also active participants in its domestic bond market. The country followed on the heels of African peers Zambia, Nigeria and Rwanda who have also tapped international investor appetite for high yield in the past year.

Ghana's debut $750 million 10-year bond launched in 2007, was four times oversubscribed and was issued at a yield of 8.5 percent. The yield on the new bond, at a premium to the 2017 instrument which is trading at around 6 percent, suggests investors were unwilling to overlook Ghana's worsening fiscal situation.

Ghana is struggling to contain a budget deficit that surged to 11.8 percent of gross domestic product in 2012, from 4 percent in 2011, according to a prospectus for the Eurobond, partly as a result of steep public wage increases.

"This suggests that Ghana offered a decent premium to compensate investors for the risks associated with the country's fiscal and macroeconomic imbalances," said Samir Gadio, emerging markets strategist at Standard Bank.

President John Dramani Mahama's government, which took office early this year, has said it aims to reduce the deficit to 9 percent of GDP in 2013. But analysts say the deficit appears to have become structural and could widen again as spending increases ahead of elections in 2016.

"You now face an economy where the strategy in order to fund the deficit is to borrow and that's not sustainable in the long run," said Gadio. By not issuing earlier in the year before a selloff in emerging market assets, Ghana also missed a "massive" opportunity as it could have paid around 5 percent, said one investor. The yield on the 2017 bond traded as low as 4.24 percent in April.

"What alarmed us as investors is the fact that the timing was bad," said the investor, who declined to be named. "Based on our analysis, the opportunity cost loss is at least $100 million on a net present value basis. That's four district hospitals if you want it in social terms."

Ghana, the world's second-largest cocoa producer and Africa's biggest gold producer after South Africa, is rated B by Standard and Poor's and B+ by Fitch, which revised the country's outlook to negative from stable in February.

Besides the budget deficit, its current account shortfall has also expanded, to $4.92 billion or 12.3 per cent of GDP, from $2.15 billion in 2007. Public debt increased to 49.4 percent of GDP in 2012, from 40.8 percent in 2011, higher than peers such as Nigeria which has a debt-to-GDP ratio of 18.6 percent. The government plans to use the bond's proceeds for capital expenditure and refinancing public debt to reduce the cost of borrowing.