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Ghana is the first country in sub-Saharan Africa to issue a zero coupon currency denominated tranche to its bond financing mix, allowing it to create fiscal space to strengthen its financial resilience.
Ghana’s first 4-year zero coupon bond has been twice oversubscribed, despite being the first of its kind to be issued by a West African ruler, further demonstrating that investors continue to support the transformation of the country. Ghana and strong fiscal consolidation efforts.
Zero coupon bonds are bonds issued without any interest and therefore trade at a discount until maturity. Thus, unlike other traditional coupon bonds, Ghana will not pay any interest on the four-year zero coupon bond. The only debt that the government of Ghana would have to honor will be the face value of $ 525 million at maturity.
The practical mechanics of a zero coupon bond
For illustrative purposes, let me apply some indicative numbers and top them off later with the actual numbers from the 2021 edition.
Assuming Ghana issues a $ 500 million zero coupon bond at a 20% reduced rate ($ 100 million), Ghana will receive $ 400 million in cash today but will repay $ 500 million when the The bond will mature in four years. However, in the meantime, Ghana will pay no interest for the four (4) years.
This bond structure means that the government can use the money it would have used to pay interest over the next four (4) years for other productive opportunities. In Ghana’s case for this bond, the government intends to use the proceeds from the refinancing of the more expensive domestic debt, which attracts an average interest rate of 19%.
Ghana therefore borrows interest free and uses the proceeds to pay off existing debt with higher / expensive interest rates.
How does this benefit Ghana?
Ghana’s existing national bonds attract an average interest rate of around 19% (or 20% for ease of analysis). So here Ghana issues a zero coupon 20% off foreign bond at $ 500 million and receives $ 400 million. If the $ 400 million is converted into Cedis, say at a cedi-dollar exchange rate of 6, that equates to roughly GHc 2.4 billion.
This can be used to withdraw existing national bonds, which currently pay 20% interest. This will save Ghana 480 million GHc in interest per year (20% multiplied by 2.4 billion GHc).
By multiplying the 480 million GHc per year by four years, we obtain 1.92 billion GHc (the equivalent of 320 million dollars) in savings over four years. If we deduct the $ 100 million that we prepaid up front on the zero coupon of the $ 320 million, we get our net savings of $ 220 million in savings over four years.
Actual calculations based on 2021 zero coupon bonds.
- Ghana issued the zero coupon bond for $ 525 million and received a present value of $ 409.5 million. This means that the present value lost for Ghana is $ 115.5 million.
- Converting the $ 409.5 million into cedis at the prevailing cedi / dollar exchange rate of 5.71 gives GHc 2.338 billion.
- Existing local bonds, for which we will use the proceeds of zero coupon bonds to fund, attract an average interest rate of 18.3% (0.183).
- Multiplying 0.183 by 2.338 by 4 (years) gives 1.712 billion GHc.
- Converting 1.712 billion GHc to dollars is 299.7 million dollars
- Now, if you subtract the discounted $ 115.5 million from the $ 299.6 million, Ghana has a net saving of $ 184.2 million, which is equivalent to GHc 1.1 billion.
- Thus, based on how Ghana will use the zero coupon bond (financing of existing expensive local bonds), Ghana will achieve savings of $ 184.2 million (GHc 1.1 billion) .
It is a novelty that deserves to be celebrated.
The coronavirus calls more than all managers of national economies to design innovative financial engineering techniques for an accelerated recovery and Ghana is doing something unique. This is a plus for all Ghanaians and economic leaders.
The author, Dr. Gideon Boako is a financial economist with years of experience in academia, public policy formulation, and government and non-government consultants. Currently, he is part of the Ghana Economic Management Team (EMT) as a Technical Advisor to the Office of the President, as well as a spokesperson for the Vice President of the Republic of Ghana, who chairs the Economic Management Team. .
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