green bond
Featured image: Stock

It is now official: Ghana’s finance minister Ken Ofori-Atta has no new ideas on how to solve his country’s debt problem. His only solution is to borrow more, and while doing so he seems to be taking advantage of the system whenever he can, writes Sebastien Laye.  

In my article published in December, I highlighted Ghana’s failed energy bond issue. As it turned out, less than half of the bonds were taken up. Read more: Ghana economic reforms needed: Rocket science

Additional media reports have focused on the commission costs (paid by the state) of $40 million. These fat fees to brokers and sundry enablers, amounted to around 10% of the funding, further diminishing the total sum raised.

But this is not the first controversial bond issue Ofori-Atta has organised since taking office just 12 months ago.

In March 2017, Ghana issued a domestic currency bond of $2.25 billion, and 95% of those bonds were picked up by just one investment fund – Franklin Templeton.

One of Franklin Templeton’s non-executive directors, Trevor Trefgarne, is closely linked to minister Ofori-Atta through joint directorship of Ghana’s Enterprise Group. This arrangement has attracted media scrutiny, chiefly due to the sums involved: at 19% interest, the Government of Ghana will pay out Frank Templeton more than $400 million per year in interest payments.

Public concerns over cosy relationships and conflicts of interest prompted the country’s non-partisan Commission on Human Rights and Administrative Justice (CHRAJ) to investigate. This parliamentary probe concluded, somewhat paradoxically, that although some processes during the energy bond issues were breached, the minister was not personally responsible.

But, even this fairly mild rap on the knuckles, which according to many analysts should have been much stronger, annoyed the minister. He is now threatening to take the CHRAJ to court.

And to top it all off, in the five-year domestic bond issue on the 8th of February 2018, Databank (the financial institution the minister founded and still has an interest in, together with his wife) played a prominent role as co-bookrunner. Incidentally, 80% of that particular debt issue will go towards restructuring maturing debt.

Ghana, a resource rich region

It is a shame that all of this is happening in Ghana. The country holds significant energy assets, including oil and gas reserves, but most importantly, for the past 25 years Ghana has been a functioning democracy.

Bad governance is now posing a risk to all sectors of the economy, nowhere more so than in the energy sector. And despite recent optimistic reports on Ghana’s growth outlook, there is real cause for concern.

Firstly, Ghana’s economy is quickly becoming a ‘one-trick pony’. The health of the economy is predicated on oil and gas revenues, with other sectors plateauing or registering sluggish growth. Consequently, once there is a slump in global oil prices, the Ghanaian economy will go into reverse.

Secondly, this time it could be a much more serious shock, as the situation is compounded by growing indebtedness. Ghana’s debt has increased – to over $30 billion – together with its stock of non-performing loans. The debt to GDP ratio is now over 70%, whereas in 2006 it was around 35%.

Finally, a significant chunk of these non-performing loans – according to some estimates around 25% – is held by the power and water sectors. In June 2017, according to Bloomberg, the utilities owed $250 million. Government’s inability to pay contractors on time, nor introduce effective revenue collection mechanisms will continue to plague the energy sector.

However, most of all, it is bad governance that has the potential to destabilise Ghana. The conduct of the Minister Ofori-Atta, suspected of facilitating deals for friends and family, while his chief concern should be to stabilise the energy sector and the Ghanaian economy, has already unnerved investors.

According to an article by Debtwire, a debt market analysis firm, the government decided to issue the bond under British law, as investors had raised concerns that they may not be able to enforce their claims in Ghanaian courts in the event of a default. This is hardly a vote of confidence in the minister and the government.

In this context, it will be interesting to see how the energy bond fiasco plays out. In the aftermath of the parliamentary probe, the opposition have demanded that Ofori-Atta is sacked, and have threatened impeachment proceedings. It is encouraging to see democracy in action, but Ghanaian decision makers need to be much more vigilant – lest their country finds itself unable to borrow, nor attract investment.

About the author

Sebastien Laye is a New York-based economist and businessman. He is founder of financing & credit arrangement firm, Laye Holdings, a provider of private debt to corporate and middle market borrowers in the USA, Canada, France, UK, and other parts of Europe. Prior to founding Laye Holdings, Sebastien worked as a leveraged finance banker and a senior analyst for a multi-billion dollar hedge fund/private equity. He is a specialist in corporate valuation, debt markets, alternative financing, macro-economics and public policies analysis.