Ghana Shocks Investors with Suspension of Debt Payments

On Monday, Ghana made the unexpected decision to suspend interest payments on its external debt. This comes before negotiations to restructure the debt in order to receive a bailout from the International Monetary Fund.

The Ministry of Finance of the West African nation announced in an emailed statement that payments on eurobonds, commercial loans, and most bilateral obligations have been suspended until an agreement with creditors is reached. This unilateral decision could make the upcoming negotiations with creditors more difficult.

Following the announcement, Ghana's international bonds decreased in value while the currency strengthened. Last week, the nation reached a staff-level agreement with the IMF for a three-year extended-credit facility worth $3 billion. The IMF noted that the approval of the arrangement by the executive board is contingent upon an agreement with external creditors.

Carlos de Sousa, a portfolio manager at Vontobel Asset Management in Zurich, which holds Ghana bonds, commented that the market was likely expecting Ghana to make payments on their debt while restructuring negotiations were underway. However, this assumption of goodwill from the government was incorrect. De Sousa went on to say that this changes the outlook of how cooperative the restructuring talks will be.

Ghana's bonds due in 2032 dropped 1.6 cents to 32.9 cents per dollar by 12:19 p.m. in London, resulting in a yield increase of 120 basis points to 29.7%, as reported by Bloomberg. This year, the yield has risen by more than 18 percentage points.

Finance Minister Ken Ofori-Atta revealed in an interview on Friday that the government had engaged in discussions with international bondholders and their representatives, and that official negotiations would begin in the near future.

He expressed his desire to go to the IMF board as soon as possible. He believes that an organized process is beneficial for everyone involved. He is hopeful that they will be able to come to an agreement and announce the measures before the end of the year.

At the beginning of December, Ghana proposed a voluntary debt-exchange program for its local bonds that would involve a reduction in interest for holders. As investors were not quick to accept the program, the government was forced to extend the deadline to December 30th from December 19th. During this period, the government is open to altering the terms of the program to better suit bondholders, according to Ofori-Atta.

The Ghanaian Finance Ministry declared on Monday that an interim measure was necessary to prevent the nation's fiscal situation from worsening. They explained that the country's financial resources, including international reserves, are limited and must be safeguarded.

Bondholders expressed their opinion that the country should have discussed a debt-service suspension with investors instead of taking the unilateral action of suspending payments.

Joe Leadbetter, a credit analyst at Emso Asset Management in London, noted that the market had anticipated a restructuring of Ghana's eurobonds payments, but had hoped it would be done through a consensual agreement. He expressed surprise at the decision to default without requesting a debt-service suspension through a consent solicitation.

Investors have seen a dramatic shift in their opinion of Ghana, from a promising investment opportunity to a risky one. In this QuickTake, we explore the reasons behind this change.

Fitch Ratings has decreased Ghana's domestic debt rating from CC to C following the initiation of the domestic debt exchange program. S&P Global Ratings has further reduced the local ratings to selective default, and Moody's Investors Service has deemed the local debt exchange a distressed event that would be considered a default. Once the bond swap is finished, Fitch Ratings plans to reduce the rating to RD, which is a default score.

Richard Segal, a research analyst at Ambrosia Capital in London, predicted that the nation's bonds will suffer further losses as investors brace for potentially hostile restructuring talks.

The news was unexpected, as it decreases the likelihood of a peaceful restructuring, according to the speaker. He added that it may not have a lasting effect, but it is certainly not beneficial in the short-term.