Bright Simmons’ Analysis on Seven Concerns with Ghana’s Debt Restructuring Plan
In the year 2000, Ghana found itself unable to continue servicing its accumulated debts and was declared a “Highly Indebted Poor Country”. As a result, Ghana underwent reforms and became the second largest recipient of debt relief in Africa between 2003 and 2006. This led to a decrease in the proportion of government revenues spent on debt servicing.
Ghana took advantage of its newfound financial freedom and discovered the Eurobond market in 2007 and built the Ghana Fixed Income Market in 2015 to expand domestic borrowing. However, the country’s debt soon outstripped its rate of growth in national output and government revenue. Both domestic and foreign borrowing expanded dramatically, causing concern among investors and leading to a loss of market confidence.
In July of 2022, the government sought an IMF bailout and began exploring a debt restructuring program. A five-member committee of bankers was formed to solicit opinions from the financial industry. However, on December 2nd 2022, the government abruptly announced a debt restructuring in which many domestic creditors stood to lose more than 60% of the value of their securities. The proposal represented the largest single transfer of wealth from the Ghanaian private sector to the government in living memory.
Despite postponing the deadline twice, the government has faced several obstacles in its debt restructuring program. The lack of engagement with those whose wealth was being expropriated was a major concern.
This essay will discuss the seven main challenges facing the debt restructuring program.
1. Effective Burden-Sharing
Comparative analysis of debt restructuring programs from various sources such as the IMF and Barclays Capital highlight a concerning aspect of Ghana’s debt crisis response plan. It appears that the government aims to shift a disproportionate amount of the burden to investors.
Some international analysts express their concern that the amount of debt reduction being sought by Ghana in relation to its overall public debt is higher than what has been seen in previous debt restructuring cases worldwide. This leads to the perception that the government is being strategic rather than fair and accommodating, which could lead to legal disputes and litigation, similar to Greece’s 2011/2012 default episode.
Moody’s research indicates that since 2015, investors have become accustomed to recovering more than 63% of their investments during sovereign debt defaults, compared to the average recovery rate of 52% since 1983. Unfortunately, the recovery rate in Ghana’s domestic restructuring is lower than 45% for many creditors, and the country’s unilateral debt service freeze signals potential steep losses for external creditors.
It’s clear that investors will have to face some financial losses, as they are better equipped to absorb the impact than the average Ghanaian citizen, who could suffer cuts in social services. However, the government is in a better position to bear the political costs of reducing patronage spending and wasteful perks.
2. Concerns about Ghana’s Fiscal Adjustment Plan
Creditors may have concerns about Ghana’s commitment to making the necessary adjustments to balance the budget and restore financial stability. The government’s reliance on debt relief and tax increases, as well as the lack of meaningful cuts to wasteful spending, may raise doubts about their willingness to take on their fair share of the burden.
Research has shown that fiscal adjustment plans that balance tax increases with substantial spending cuts are more successful than those relying mainly on tax increases. Veronique de Rugy and Jack Salmon have reported a 55% success rate for the former, compared to 38% for the latter.
Creditors worry about the credibility of the adjustment plan because they don’t want to be at risk of losing more in the future. If they accept the proposed losses, and the plan fails to achieve its goals, they may be left with devalued debt and the possibility of another default.
History shows that countries that have defaulted once are more likely to default again, particularly those in frontier economies. Tamon Asonuma reports that, on average, these countries have defaulted more than 4 times every 3 years.
Therefore, without clear assurance about the government’s fiscal strategy, restructuring negotiations may take longer to reach a resolution, as seen in other cases.
3. Poor Stakeholder Management
In terms of stakeholder management, the Ghanaian government’s approach differs greatly from other countries that have undergone similar debt restructuring exercises. Unlike the extensive consultations and regular engagements that took place in Jamaica, for example, the Ghanaian government has only held a few meetings where monologues were exchanged and vague reassurances were given. This method of conducting policy may not be effective in a debt restructuring exercise of this scale, where a significant amount of money is involved.
Creditors are calling for more formal and meaningful participation in the process through a formal committee, as well as the involvement of top financial and legal experts paid for by the government. Failure to meet these demands may result in opposition from major creditors and ultimately, the failure of the exercise.
Despite the lack of organized opposition to the IMF and debt restructuring program, the government has failed to engage critical stakeholders effectively, demonstrating a lack of leadership. The government’s inability to build a strong consensus around the measures needed for recovery is concerning.
The government’s approach is not limited to domestic matters, as they also announced a freeze on external debt servicing without seeking consent from foreign creditors. This action may result in greater losses for investors, as seen in past cases like Russia and Argentina.
The government’s timeline for the conclusion of the debt restructuring process is highly optimistic, considering other countries have taken several months to a year to complete similar exercises. It remains to be seen whether Ghana’s haste in the process will have a positive or negative impact on investor relations and the ultimate outcome of the provisional IMF deal.
4. Lack of Legislative Guardrails
The advice from Ghana’s Attorney General about the unconstitutionality of retrospectively attacking creditor rights has been widely discussed. However, this is a well-known fact. In the Greek debt default episode (2011-2012), similar issues were thoroughly addressed and the resulting laws provided a framework for government bankruptcy proceedings and voting mechanisms for an orderly resolution.
Closer to home, Ghana’s 2016 law for resolving banks serves as an example. The law was applied to banks established before its passage, without claims of retroactive dispossession of owners.
Ghana is currently in a unique situation and needs to undergo some form of bankruptcy process. Rights and obligations are being established on the fly, and laws passed with bipartisan support can clarify these areas and give weight to these significant developments. Leaving everything to the discretion of the Finance Ministry alone would underestimate the magnitude of the crisis and its future socio-political impact.
5. Sharing the Benefits and Mitigating Risks
Debt restructuring negotiations are based on forward-looking projections and thus involve a significant amount of uncertainty. For instance, the government’s projections of future economic trends such as growth, interest rates, and inflation may not pan out as expected. This could cause the value of the new bonds to fluctuate based on changes in the economy.
Additionally, any economic improvement could be due in part to the fiscal room created by the debt restructuring, which would have been partially paid for by investors. Investors would prefer not to make long-term sacrifices only for the situation to improve, with all the benefits going to the government.
Fortunately, the rise of contingency instruments has made it possible to equitably share any benefits or upsides. For example, some countries have used GDP warrants or tied warrant offers to government revenue to offer investors assurance of higher earnings in the event of economic growth. Similarly, some investors seek protection from a worsening economic situation while some governments look for additional coverage for natural disasters and other severe events.
Ghana’s current proposals do not offer these creative possibilities. It may be time to consider implementing game-proof mechanisms that benefit both the government and its creditors.
6. Credit Enhancements in Exchange Instruments
Creditors are familiar with receiving added benefits when sovereign debtors seek debt relief through exchanging new instruments for old. This often involves enhancing the new instruments to compensate for any initial losses. For instance, the African Development Bank backed the new debt instruments tendered to investors by Seychelles after its default in 2010, much like the US Treasury backed the “Brady Bonds” used in resolving the Latin America debt crisis in the 1980s. Greece also offered exchange notes protected by English law to replace older bonds with lesser domestic law protection. Russia, in a similar move, added Eurobond features to its replacement bonds in 2000 to appease bond investors.
Ghana, on the other hand, is proposing the use of single-limb collective action clauses in the new bonds, which would make future defaults easier. It is also removing English law protection from the ESLA and Templeton bonds, and applying a total interest standstill that would nearly eliminate the traceability of the new bonds in 2023. These actions could diminish the liquidity prospects for the new bonds that some fund managers have anticipated.
The new bonds offered by the government of Ghana to replace existing government bonds are not only lacking in enhancements but also have lower quality in other aspects. Despite this, it is acknowledged that debt restructuring can lead to real liquidity relief and give the government the fiscal space to reset the economy towards a path of sustainable growth. However, the fairness of this situation is a concern. Investors were encouraged to invest funds that supported the government’s image. If the circumstances have changed, they should not be required to contribute additional funds to benefit the government’s situation
7. Maintaining Consistent Communication
During a sovereign debt default, there is often a great deal of uncertainty and confusion. In such a situation, clear and consistent messaging from the defaulting government can help to alleviate the concerns of investors and maintain confidence.
Recent statements from the government about avoiding haircuts in the debt exchange program have been inconsistent with the actual terms of the program, which includes significant reductions in coupon rates and maturity dates. This disconnect between promises and actions has caused confusion among investors and eroded trust.
The government’s decision to exclude treasury bills from the debt exchange was presented as a gesture of support for ordinary citizens who hold these savings, but the real motivation is likely to preserve access to public financing. A clause in the exchange agreement has also raised questions about the possible future inclusion of treasury bills.
Additionally, the government’s shift from a pledge to collaborate with local creditors in the debt restructuring process to a reliance on foreign advisors and consultants has also raised concerns.
To ensure the success of the debt exchange program, it is essential that the government provides clear and consistent messaging to investors.
In Summary
The Ghanaian authorities recently set a new deadline of January 16, 2023 for the debt restructuring program, indicating a willingness to address the concerns of creditors. The proposal now includes 12 new instruments to replace the 69 existing bonds, and the exemption for non-institutional bondholders has been revoked, following the exemption of pension funds.
While the proposal shows some flexibility, it still falls short of the creditors’ demands for co-creation. The government’s approach of negotiating without a coordinating mechanism raises questions, but it is believed to be cautious about potentially compromising its negotiation position.
However, this approach may result in a fragmented creditor community and the possibility of external holders of domestic debt preparing to litigate. A group holding derivatives that expose them to defaults on Ghanaian securities has already sought an advisory opinion on the default status of Ghana.
As the estimated 22.5 billion GHS in possible liquidity relief from the debt restructuring exercise is slowly evaporating, with nearly 50% of domestic debt likely to fall under exemptions, the government is facing a challenging situation.
The Finance Ministry has issued a warning to render outdated domestic bonds worthless by making it difficult for them to be used as banking assets. However, this approach is not wise, as the government’s top priority is to ensure financial sector stability, and they are willing to loosen regulations to achieve this goal.
The decision to exempt entities such as pension funds from the debt restructuring has created additional logistical challenges. Implementing strict rules on the GFIM trading platforms to distinguish between certain old bonds could lead to confusion and require significant time and effort from international contractors and IP owners who manage the platform. If holdouts exceed 40%, these logistical challenges will only escalate.
The Ghanaian government must proceed cautiously when it comes to the debt restructuring program and its impact on the financial sector. Insurance companies, as holders of government debt, play a crucial role in the intermediation of the financial system and any action that could destabilize them should be avoided.
The government should focus on building consensus and involving creditors in the process of finding a solution. By creating a sense of shared responsibility and using incentives, the government may be able to increase participation rates and reach its target of 80%. A co-creation process with the support of expert modellers could be a more effective and efficient way of addressing the challenges posed by the debt restructuring program.
As the deadline for the debt restructuring program approaches, it’s crucial for the government to address the concerns raised and work towards a solution that is agreed upon by all parties involved. Unilateral decisions and announcements should be avoided, and any actions taken should have the full support of the key creditor groups. This will help to improve the government’s credibility and pave the way for a successful debt restructuring program and a new IMF deal.