Ghana’s finance minister, Ken Ofori-Atta, this evening announced a Domestic Debt Exchange Programme which seeks to exchange domestic bonds as at December 1, 2022 for 4 new bonds maturing in 2027, 2029, 2032 and 2037. These new bonds will pay no interest in 2023, 5% interest in 2024, and 10% interest per annum until maturity. Treasury bills are exempt from this debt exchange programme. So are individual bondholders.

The allocation of current bond values will be 17% to the 2027 bond, 17% to the 2029 bond, 25% to the 2032 bond and 41% to the 2037 bond. What this means is that the repayment of the principal values will be paid as follows – 17% in 2027, 17% in 2029, 25% in 2032 and 41% in 2037. This stretching of the repayment periods, accompanied with the low interest rates being proposed, represent a significant loss in real returns for institutional bondholders.

This debt exchange programme is more severe than the restructuring I anticipated in my post back in September. They feature both a maturity extension and a haircut in interest payments. Even though they do not technically include a principal haircut, the real value of the bonds are going to be so eroded by maturity that it may have been more profitable for investors to get an upfront principal haircut and for the interest and maturity periods to be maintained.

The impact of this plan on financial institutions would be significant. The government is addressing this by establishing a Financial Stability Fund (FSF) “to provide liquidity support to banks, pension funds, insurance companies, fund managers, and collective investment schemes to ensure that they are able to meet their obligations to their clients as they fall due.”

This debt exchange programme leaves me disturbed. For starters, I had already explained the mark-to-market valuation of bonds which had led to industry-wide drops in customer’s investment balances. With this exchange plan, what market value are these balances going to reflect. The plan essentially dries up the secondary market for bonds and all but removes the ability of fund managers to sell bonds to meet redemptions. This leaves them either selling treasury bills or needing to find a gap financing source to pay investors (while the FSF is being set up).

Another concern is that the Daakye Bond (secured by GETFund levy) and the ESLA Bond (secured by energy sector levies on fuel) are also going to be affected by the restructuring although they are tied to their own revenue sources.

Also is the government going to issue any new bonds at all? Or is it essentially going to stay out of the domestic capital market for 15 years (until 2037)? And if it does issue new bonds, how is it going to convince investors that this time it would be different? And while we’re on this question, is the government going to be able to push through an equally severe debt exchange programme on external debt holders? And how would it enforce it?

Make no mistake about it, this is an unfortunate development in Ghana’s investment industry and a significant blot on Ghana’s reputation as a location for investment. I have spent the better part of a decade pushing the Invest in Ghana story, and although I still believe in that long-term, I cannot help but feel culpability for anyone who is facing a loss due to this restructuring.

Now the minister’s proposal is not going to go without some resistance. But that is for another day. Tonight, we wail and recall how we got here.