As Deadly Floods Subside, Ghana’s Borrowing Costs Are Rising

The floods that devastated Ghana’s capital, Accra, this month have subsided. Now borrowing costs are rising as investors fret that fixing the damage will add pressure to government finances already strained by low oil prices and the smallest cocoa harvest in five years.

The West African country’s dollar bonds, which had the best returns after Gabon in the first five months of the year out of nine sub-Saharan African sovereign nations tracked by Bloomberg indexes, have lost 3 percent since June 3, when flooding resulted in almost 200 deaths and left thousands homeless. Only Zambia’s debt performed worse in the period. Yields on Ghana’s $1 billion of securities due August 2023 climbed to a four-month high this week.

The rise in yields comes as Ghana prepares to sell as much as $1 billion in Eurobonds, two months after the nation obtained almost the same amount in loans from the International Monetary Fund. While President John Dramani Mahama pledged to take measures to prevent annual flooding, his government is bound by the IMF agreement to narrow a budget shortfall just as it faces the slowest economic expansion in 20 years and inflation at a four-month high. That’s disturbing investors, who doubt the government’s ability to stick to fiscal targets.

Commit Funds

“Government will have to commit more funds to help the situation,” Courage Kingsley Martey, an economist at Accra-based Databank Group Ltd., said in a telephone interview on June 15. Investors “are going to price the country’s financial difficulties which have been exacerbated by these floods into the yield,” he said.

Storm drains and gutters overflowed on June 3 during the heaviest day of rain in six years and about 150 people were killed in an explosion at a gas station where they had taken refuge. The crisis underlined years of shortfalls in infrastructure spending that has failed to keep up with a growing urban population and economic expansion.

Repairing the flood damage and preventing a repeat may cost “hundreds of millions of dollars,” Mahama said on June 13. The government is targeting a fiscal gap of 7.5 percent of gross domestic product this year compared with 9.3 percent in 2014. Last year, Ghana shelved a $600 million project to improve the city’s drainage network and expand the sewer system.

Financing Needs

“The cost of the flooding adds to Ghana’s large external financing needs, and can weaken policy focus from the fiscal consolidation being envisaged under the IMF program,” Raza Agha, an economist at VTB Capital Plc in London, said in a reply to e-mailed questions. “The flooding raises social pressures at a time when high inflation, a weakening currency, high borrowing costs and low growth are already exerting a heavy toll on the population.”

The government plans a Eurobond sale, the third in three years, after the IMF conducts a review of the economy this month, Mahama said June 13. The World Bank pledged to guarantee those securities and other bonds with a maturity of 10 years or longer, he said. The cedi gained 0.8 percent to 4.3450 per dollar as of 1:32 p.m. in Accra on Friday, after falling to a record low 4.43 on June 15. The currency has lost 26 percent this year, the most among 24 African currencies tracked by Bloomberg.

Cocoa output from the world’s second-biggest producer of the chocolate ingredient may drop 25 percent from last year, according to Ecobank Transnational Inc. That’s curbing revenue from the commodity that was the biggest source of Ghana’s foreign exchange in the first quarter. The nation produces about 100,000 barrels of oil a day from its Jubilee field, operated by Tullow Oil Plc, and started exporting in 2010.

‘Drunken Sailors’

“I’m still wary of Ghana; they spent their money like drunken sailors with the idea that the Jubilee field was going to solve all their problems,” Ray Zucaro, who helps manage about $380 million at Los Angeles-based SW Asset Management, said by phone on June 10. “If they were able to get a guarantee, it would basically take out your credit risk.”

Without it, Ghana would have to pay up, said Holger Siebrecht, who helps oversee $350 million of emerging market debt at Acadian Asset Management LLC.

“We’ll stay out of that credit,” Siebrecht said by phone from Boston on June 10. “But everything has a price. If the yield’s attractive enough, there will be investors that are tempted.”

Source: Bloomberg.com

By: Moses Mozart Dzawu & Paul Wallace

#News #BusinessEconomy #Economy #BorrowingCost