Ghana: admission of default is a welcome reality check

The pandemic, Russia’s war in Ukraine, soaring food and fuel prices, rising global interest rates and a surging US dollar: it would be hard to find a more toxic mix for developing countries’ finances. Ghana became the latest to move closer to debt default this week after the government suggested sovereign bondholders could be asked to take a 30 per cent “haircut” on their investments.

It was a humiliating reversal of recent government assurances to the contrary. Investors should welcome it as a recognition of reality.

Ghana is unlike recent defaulters such as Zambia and Sri Lanka, where years of government profligacy and mismanagement brought fiscal problems to the brink of crisis before the pandemic tipped them over the edge.

Ghana benefits from a healthy mix of commodity exports — gold, cocoa and oil — and a history of tackling fiscal problems before they get out of hand. In July, it asked for what would be its 17th package of support from the IMF. Its most recent ended in April 2019.

The policy reforms implemented then were unable to withstand the shock of Covid-19 and subsequent global crises. The government spent heavily, both on its pandemic response and on a successful re-election bid.

Since then its fiscal worries have deepened. Debt service absorbed 54 per cent of government revenues in the first half of this year. Local bond yields peaked above 50 per cent this month, from 21 per cent in March.

Yet officials appeared to be in denial. They announced plans to sell foreign debt this year when rising interest rates meant markets were already closed. Last month, President Nana Akufo-Addo promised creditors there would be no haircut.

This week’s admission of the inevitable brings a new IMF programme closer. The risks are priced in: yields on Ghana’s sovereign bonds barely budged on the news from their already highly stressed levels — a $1.25bn bond maturing in 2032 with an 8.125 per cent coupon at present yields about 30 per cent. It is too early to buy.