Eurobonds surge following IMF accord approval

Eurobonds surge following IMF accord approval

** refreshed take **

Ah, the Ghanaian cedi's on a roll! The nation's Eurobond prices have seen a significant boost thanks to the exciting news that a staff-level agreement with the International Monetary Fund (IMF) on a three-year Extended Credit Facility (ECF) worth a whopping $3 billion (or around SDR 2.242 billion) has been sealed.

This scintillating news has followed closely on the heels of other positive developments, with both debt instruments - trading at distressed levels - and the local currency gaining ground on account of the announcement of concrete measures aimed at debt sustainability.

RMB Research, keeping a close eye on the market following the SLA announcement, declared, "As was to be expected, Ghanaian Eurobonds rallied on the back of the news. Ghana's 2027 Eurobond gained in excess of 7 percent on the session to outperform its peers".

Market experts also took note of Ghana's bonds, which were primed to capitalize on the recent US inflation that slowed down in November. This dip in inflation allowed for market expectations that the Federal Reserve will ease off its hawkish stance, providing an additional fillip to Ghana's bonds.

"It must be noted, however, that Ghanaian bonds would have also found support from the weaker-than-expected US CPI data, which bolstered bets for the FOMC to scale back its pace of monetary policy tightening."

It's worth mentioning that the local currency had been recovering from months of depreciation against the American greenback and other major trading currencies, following the announcement by the government of a debt exchange - an essential precursor to the Fund's assistance. This recovery seems to have given the local currency a mighty push that could prolong the cedi's resilience through December 2022.

Before this rally, RMB Research had backed the cedi to maintain its run, arguing that optimism was returning, and the local unit was undervalued.

The recent cedi rally has seen traders in the derivatives market pare back their bets for depreciation in the months ahead. The 3-, 6-, and 12-month non-deliverable forward outright have all trended lower in recent sessions.

"From a valuation point of view, the cedi is deeply undervalued on a real effective exchange rate basis. This suggests that there is room for the currency to appreciate in the coming months, should Ghana's macroeconomic backdrop improve meaningfully," it noted.

In a statement, the IMF stated that the government aims to restore macroeconomic stability and debt sustainability while protecting the vulnerable, preserving financial stability, and laying the foundation for a strong and inclusive recovery.

While the SLA won't become legally enforceable until it gains Management and Executive Board approval, it serves as a clear signal of both parties' commitment to implementing the suggested economic programme to alleviate the nation's economic problems.

The Fund, in a statement, indicated that this initial agreement on the economic programme will restore macroeconomic stability and debt sustainability while laying the foundation for stronger and more inclusive growth. Key reforms are aimed at ensuring sustainability of public finances while protecting the vulnerable. The fiscal strategy relies on frontloaded measures to increase domestic resource mobilization and streamline expenditure.

However, receipt of the necessary financing assurances from Ghana's partners and creditors remains essential to the IMF Management and Executive Board approval, following this staff-level agreement. Sufficient progress on the debt exchange front will be needed before the proposed Fund-supported programme can be presented to the IMF Executive Board for approval.

Currently, the Debt Sustainability Analysis (DSA) demonstrates that the country's debt servicing absorbs more than half of total government revenues and almost 70 percent of tax revenues. Additionally, the total public debt stock, including that of state-owned enterprises among others, exceeds 100 percent of the gross domestic product (GDP).

Under the arrangement, the government proposes to exchange existing domestic bonds as of December 1, 2022, for four new bonds maturing in 2027, 2029, 2032, and 2037. These new instruments will pay no interest in 2023, 5 percent interest in 2024, and subsequently 10 percent interest per annum until maturity. The predetermined allocation ratios are 17 percent for short-term bonds, 17 percent for intermediate bonds, 25 percent for medium-term bonds, and 41 percent for long-term bonds.

This exchange, when completed, will provide the government with some fiscal space to operate, as it envisions reducing, particularly, the domestic interest cost in 2023 - which is estimated at GH¢31.29 billion out of the total GH¢52.55 billion.

1. The staff-level agreement with the IMF on a $3 billion Extended Credit Facility (ECF) marks a significant step towards stability and sustainable growth in Ghana, with optimism returning to the market.
2. Ghanaian Eurobonds have capitalized on recent favorable market conditions, such as the US inflation slowdown and the IMF's program for debt sustainability, gaining over 7 percent on session and outperforming peers.
3. The recovery of the local currency continues after months of depreciation, thanks to the debt exchange announcement and the IMF's support, potentially prolonging the cedi's resilience through December 2022.
4. Trading in the derivatives market has shown a reduction in bets for cedi depreciation, as the non-deliverable forward outright has trended lower in recent sessions.
5. The proposed economic program aims to increase domestic resource mobilization, streamline government spending, and protect vulnerable groups, while ensuring sustainability of public finances and reinforcing Ghana's commitment to fiscal responsibility.

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