Ghana holds presidential and parliamentary elections on Dec. 7 amid concerns over its rising debt pile, but that has not stopped some investors from buying up its bonds on a bet that the next government will move to repair the public finances.
The two main presidential candidates are promising to spend more if they win the tightly contested vote, while the financial fallout of the coronavirus pandemic has pushed up the debt-to-GDP ratio past 70% and prompted the International Monetary Fund to flag the danger of debt distress.
The West African nation, a major producer of gold, oil and cocoa, has suffered its first economic contraction in almost four decades as a result of the pandemic and the lockdown it caused.
But investor confidence has been buoyed by hopes that post-election Ghana will resume the path of economic reforms, gain fresh IMF support and not follow Zambia into default.
Warmer sentiment towards global emerging markets in general after recent vaccine developments have also lifted sentiment.
Ghana’s bonds were the third best performing in emerging markets last week, returning 2.5%, according to EPFR and Citi, extending a recovery from March following the chaos wrought by the pandemic.
Franklin Templeton, BlackRock and Aberdeen Standard Investments raised Ghana exposure in their emerging market bond funds in recent months, holdings data shows.
“We feel the political risk premium and, to some degree, associated policy uncertainty embedded in current credit spreads overstate the risks to Ghana’s ability and willingness to service its debt,” said Yvette Babb, emerging markets debt portfolio manager at William Blair, which is overweight Ghana in its hard currency emerging market debt fund.
Ghana’s finance ministry in October revised higher its 2020 growth forecast to 1.9% and for 2021 to 5.9%, while trimming its 2021 fiscal deficit estimate to 8.3%.
“The fiscal situation is indeed fragile with the deficit reaching 15% of GDP this year, but once the election is out of the way we think they can embark on a fiscal consolidation path,” said Rodica Glavan, senior portfolio manager at Insight Investment.
Along with many other investors, Glavan expects President Nana Akufo-Addo and his New Patriotic Party (NPP) to win another four-year term.
There has been little talk of fiscal consolidation on the election campaign trail.
The NPP has pledged a new airport in the central region and a rental support scheme, while the main opposition National Democratic Congress (NDC) promises more infrastructure investment and free laptops for university students.
“The manifestos of the two parties are based on spending promises but are small on funding plans or proposals,” said Leslie Dwight Mensah, economist at the Institute for Fiscal Studies in Ghana.
The impact of the pandemic has strained the government’s fiscal position, with 50% of revenues used to service debt, said Ankit Khandelwal, director, Africa coverage at MUFG EMEA.
“There is a need to fiscally adjust back to the 5% deficit in the fiscal rule, a key target in the next few years to reduce significant gross funding needs, interest rates, costs and stabilise debt ratios,” said Christian Libralato, portfolio manager at BlueBay Asset Management.
A credible fiscal policy would also allow Ghana access to debt capital markets again in 2021, said Libralato, adding that a funded IMF programme would boost confidence in debt sustainability.
Ghana received $1 billion in emergency IMF funding earlier this year.
“Ghana followed a clear path of reforms, thus placing themselves on a stronger footing to deal with the COVID-19 onslaught, in spite of substantial challenges,” said Simon Quijano-Evans, chief economist of Gemcorp Capital.