What Ghana debt review tells Kenya


What Ghana debt review tells Kenya. PHOTO | POOL

Ghana has unveiled details of its domestic debt restructuring programme. Domestic bondholders will now be asked to exchange their instruments for new ones.

Existing domestic bonds as of December 1, 2022, will be exchanged for a set of four new bonds maturing in 2027, 2029, 2032 and 2037.

The coupon on the new bonds will be set at zero per cent in 2023, 5 per cent in 2024 and 10 per cent from 2025 until maturity.

Coupon payments will still be semi-annual. Essentially domestic bondholders in Ghana will be taking a massive haircut on interest.

Ghanaian bonds offered some of the highest returns, with average coupons of around 18 per cent.

Coupons ranged between 17 per cent to 22 per cent with some bonds offering as high as 25 per cent. Slashing the coupons to zero and five per cent represents a massive haircut on interest for holders.

However, it is clear that holders will not be taking a haircut on their principal. That notwithstanding, this move now has two major implications.

First, Ghanaian banks must now allocate capital against domestic debt holdings since the restructuring has now introduced an element of risk to the central government’s creditworthiness (and the ‘risk-free’ adage only becomes a perception rather than a reality).

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This has the potential to weaken their balance sheets since domestic debt accounts for a quarter of Ghanaian banks’ assets. Secondly, Ghanaian pensioners have to pay the price of a government’s lack of fiscal discipline.

But the restructuring of the domestic debt was always inevitable, primarily due to the steep cost. In 2021, Ghana’s domestic debt service was 8.3 times what it spent on external debt service.

The international monetary fund (IMF) also stood its ground on the same issue.

For Kenyan banks, this is not far from home. There are indications of domestic debt restructuring.

At his confirmation hearing last month, the Treasury Cabinet Secretary Professor Njuguna Ndungu suggested swapping domestic debt with concessional external debt (due to the steep costs).

However, such a move will likely exacerbate foreign currency risks on debt holdings (since nearly all of the country’s debts would be owed in other people’s currencies).

Sometimes you need to have that room to be able to kick the can down the road. And perhaps there could be other considerations.

Last month, the Central Bank of Kenya sold the second switch bond seeking to roll over some Sh87 billion in treasury bills and bonds that were meant to mature on January 9, 2023, by way of issuing a six-year infrastructure bond with a coupon of 13.125 per cent.

However, the sale wasn’t a complete success since it was only able to roll over sh49.1 billion, with holders of the balance opting for redemption. Perhaps because it was not a mandatory switch, but maybe that is coming. Nonetheless, the issuance of switch (rollover) bonds speaks to a weak fiscal trajectory (probably much weaker than we previously thought).

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And just like in Ghana, restructuring of the domestic debt may be inevitable at some point. The Parliamentary Budget Office (PBO), in its note “Budget Options for 2022/2023 and the Medium Term”, cited restructuring of Kenya’s domestic debt as a debt sustainability option due to its steep costs.

Domestic debt service accounts for 74 per cent of total public debt service even though it accounts for only 48 per cent of total debt stock.

In comparison, external debt, while accounting for 52 per cent of total debt stock, accounts for only 26 per cent of debt service.

This, according to the PBO, implies that restructuring domestic debt can have a greater impact on alleviating the current debt-service burden.

When the domestic debt restructuring happens, central government credit loses its risk-free tag; and commercial banks, whose domestic debt holdings accounted for a third of their total assets, should be ready to allocate capital to central government credit.

For investors, this would mean a freeze on dividends for a period of time as banks adjust their balance sheets accordingly. And perhaps this could mark the beginning of the end of lazy banking.