Cedi Now International Currency!

Wonderful things are happening to Ghana under President John Agyekum Kufuor. Under the New Patriotic Party, in September 2003, Ghana gained its first ever sovereign credit rating. Though its import may not have been so obvious at the time, Government was quick to stress that it would guarantee the country's efforts to mobilise resources from private capital markets, which are required to secure accelerated rates of economic growth and reduce poverty.
Now, the benefits of Ghana"s credit rating of 'B+' from both Standard & Poor's and Fitch Ratings are becoming more and more obvious. By the end of 2006, an estimated $900m is likely to be raised through the international market, a figure likely to more than double next year.

For the first time ever in this country's history, and indeed in the history of any local currency in West Africa, the cedi, once rated among the most discredited currencies across the globe, is going to be traded publicly on the international market.

Friday, the African Development Bank launched a two-year fixed rate Eurobond offering in cedis, the first supranational borrower to issue in the West African nation's currency, according to Reuters. "This is the first supranational borrower to issue in Ghanaian cedis, or indeed any west African currency,” Ade Adebajo, director of debt capital markets-Africa at Standard Chartered, said on a conference call with AfDB officials.

The size of the issue is expected to be equivalent to between $20-30 million and benchmarked off the Ghanaian government bond curve with currency exposure against the cedi. The bond, which is being issued off of the bank's global debt facility, will settle in US dollars.

A bond is a debt instrument requiring the issuer (also called debtor or borrower) to repay to the lender or investor the amount borrowed plus acceptable contractual interest over a specified period of time. The purpose of a bond is to provide lower cost fixed term financing to the issuer.

Standard Chartered is lead manager of this Eurobond transaction, which is expected to have a trade date of October 17 and settlement on October 19. The offering settles through Euroclear and Clearstream. Euroclear and Clearstreams are two leading international central securities depositories, providing for international securities transactions covering bonds, equities and investment funds.

This issue follows high on the heels of the $810 million (receivables-backed pre-export finance term) loan arranged in September by Standard Chartered Bank and Natexis Banques Populaires of France for the Ghana Cocoa Board. That transaction remains the largest structured soft commodity syndicated deal ever in Africa.

The Cocobod deal was 47 percent oversubscribed from the $600 million originally sought, with the 26 participating banks in the loan having to be scaled back as the result of the very high level of appetite displayed in the market.

Again, to underline Ghana's growing presence in the international market of finance, earlier in April, the US Securities and Exchange Commission sanctioned Ghana Telecom to proceed with its $40 million bond issue. Thus, when the country's leading stockbrokers, Databank Financial Services, raised that $40 million (around ¢275 billion) for GT, the country's biggest telecommunications company, it was the first ever time that a Ghanaian company had successfully gone to the international market to raise money through bonds.

The bonds, denominated in cedis, were to generate much needed investment for GT's network upgrade programme.

The Executive Chairman of Databank, at the time saw the historic incursions into the matured investment zones of the world by a Ghanaian company as a very strong indication of the gains of macro-economic stability in the country, enhancing the attractiveness of our local companies to international investors.

Speaking to The Statesman at the close of the bond issue, Ken Ofori-Atta said, “We believe that GT has led the way and we expect more Ghanaian firms to follow. The GT floatation is historic and significant and may very well be the opening that the country needs to attract new types of capital.”

He was not wrong. With this latest Eurobond issue, the cedi becomes the fourth local currency in Africa that AfDB has issued debt in. The others are Botswana pula and Tanzanian shillings, as well as South African rand, bank officials said.Hassatou N'sele of the AfDB's Treasury department reiterated the significance of the prevailing environment when he announced that the bank chose Ghana for its good macroeconomic environment and political stability.

“We believe issuance in that currency will bring visibility and focus more positive attention into the continent,” she said.The proceeds of the debt sale will be used for general lending purposes, said Sandeep Jain, senior Treasury officer at AfDB. “Our target is to expand operations in local currencies. We look at the continent, the status of development and go where we feel there is a market,” AfDB's de Longuemar added.

Mr Ofori-Atta, who is also the publisher of The Statesman, points to pension funds and mutual funds across the globe as the major sources of investment for any emerging or developed economy, underlining the significance of Ghana making a bold entry into that field.

“The success of the GT bond flotation in the domestic and international markets indicates a strong and growing appetite for fixed income/bonds for emerging markets.”

Explaining further, “On the domestic front, with interest rate and Treasury bill yields coming down, corporate bonds are showing to offer better yields.”

He further notes, “In the international market there is excess liquidity due to increases in commodity prices, due to new wealth coming from China, Russia and India and to the particular advantage of well-placed emerging markets there is excess liquidity due also to the current very low returns for financial instruments in the West. Fund managers are therefore very hungry for high returns so countries in emerging markets such as Ghana, which has secured favourable ratings from Standard and Poors, and Fitch, offer attractive destinations for investment.”

Until the GT bonds, Cocoa Marketing Board had been the only Ghanaian Institution that was able to raise money (loans) from the international market, to finance the purchase of Ghana's biggest export product, cocoa.

The Accra Metropolitan Authority, the Tema Municipal Authority and their counterpart in Kumasi were among those seen as ripe for the bonds market. However, as Sulley Mustapha reports today, the Tamale Municipal Authority is likely to beat the usual suspects to it.

In the past, only the Bank of Ghana issued BOG and Government of Ghana (Treasury) bonds of maturity 2, 3 and 5 years. Due to high inflation rates in the domestic economy, the issuance of 5years bonds were discontinued in 1994 in favour of short dated securities (the 91-day and 182-day bill).

Oddly enough, former Vice President John Evans Atta Mills (and aspiring presidential candidate for the National Democratic Congress) is on record for playing down the advantages of low inflation rates as arguably meaningless.Under the NDC, the lack of a vibrant bond market in Ghana was attributed to a number of factors including unfavourable economic environment, availability of other investment substitutes and the absence of credit reference/rating agency.

In the early 1990's, for instance, the domestic economy came under severe inflationary pressures as a result of a rapid monetary expansion, especially in the latter part of 1992. The rate of inflation rose from 13.3% year-on-year in December 1992 to 70.8% in December 1995.

The inflationary situation, prior to 2001, coupled with a continuous depreciation of the cedi, led to high levels of interest rates in the domestic market, making longer maturity instruments highly unattractive.

Thus, officials of the Ghana Stock Exchange admit, the economically unstable environment did not favour the issuance of securities that paid a fixed premium into the long term.

Investors' preference, according to analysts, was to invest in relatively high yielding but risk free instruments such as treasury bills.

Also, the absence of any credit rating of Ghana by any of the major international rating companies - Standard and Poors, Moody's Investment Service, Fitch etc – meant that financing of Government budget could be done only on the domestic market through the issue of treasury bills and notes and in the international market through loans and grants.