Ghana is the first Sub-Saharan African country to issue a foreign currency-denominated zero-coupon bullet tranche to its bond financing mix, enabling it to create fiscal space to build its financial resilience.
Ghana’s debut four-year zero-coupon bond was two times oversubscribed, despite being the first of its kind to be issued by a West African sovereign, further demonstrating investors continued support for Ghana’s transformation story and strong fiscal consolidation efforts.
Zero-coupon bonds are bonds issued without any interest, hence trades at a discount till maturity. Thus, unlike other traditional coupon-bearing bonds, Ghana will not pay any interest on the four-year zero-coupon bond. The only debt obligation that the government of Ghana would have to honour will be the face value of $525 million on maturity.
The practical mechanics of a zero-coupon bond
For the purposes of illustration, let me apply some indicative figures and later crown them with the actuals from the 2021 issuance.
Assuming Ghana issues a $500 million zero-coupon bond at a discounted rate of 20% ($100 million), Ghana will receive $400 million in cash today but pay back $500 million when the bond matures in four years. However, in the interim, Ghana will not pay any interest over the four (4) years.
This bond structure means the government can use the money it would have used in making interest payments over the next four (4) years for other productive opportunities. In the case of Ghana for this bond, the government has the intention of using the proceeds to refinance more expensive domestic debt, which attracts an average of 19% interest rate.
So Ghana is borrowing at no interest and using the proceeds to pay existing debt with higher/expensive interest rates.
How does this benefit Ghana?
Ghana’s existing domestic bonds attract an average interest rate of about 19% (make it 20% for ease of analysis). So here, Ghana issues a 20% discounted zero-coupon foreign bond at $500 million and receives $400 million. If the $400 million is converted to Cedis, say at a cedi-dollar exchange rate of 6, that is equivalent to approximately GHc2.4 billion.
This can be used to retire existing domestic bonds, which currently pay an interest of 20%. This will save Ghana GHc480 million Cedis in interest savings a year {that is 20% multiplied by GHc2.4 billion).
Multiplying the GHc480 million a year by four years gives GHc1.92 billion (the equivalent of $320 million) in savings over the four years. If we deduct the $100 million we pre-paid upfront on the zero-coupon from the $320 million, we get our net savings which come to $220 million in savings over the four years.
Actual computations from the 2021 Zero-coupon bonds
- Ghana issued the zero-coupon bond for $525 million and received a discounted value of $409.5 million. Meaning the discounted value forgone for Ghana is $115.5 million.
- Converting the $409.5 million to cedis at the prevailing cedi/dollar exchange rate of 5.71 gives GHc2.338 billion.
- Existing local bonds for which we will use the zero-coupon bond proceeds to finance, attract an average interest rate of 18.3% (0.183).
- Multiplying 0.183 by 2.338 by 4 (years) gives GHc1.712 billion.
- Converting the GHc1.712 billion to dollars gives $299.7million
- Now, if you subtract the discounted $115.5 million from the $299.6 million, Ghana is making a net savings of $184.2 million, the equivalent of GHc1.1 billion
- Thus, based on what Ghana will use the zero-coupon bond for (financing existing expensive local bonds), Ghana will make savings of $184.2 million (GHc1.1 billion).
This is a novelty worth celebrating.
Coronavirus more than calls on all national economies’ managers to devise innovative financial engineering techniques for accelerated recovery and Ghana is doing something unique. It is a plus for all Ghanaians and the managers of the economy.
The author, Dr Gideon Boako is a Financial Economist with years of experience in academia, public policy formulations, and governmental and non-governmental consultancies. Currently, he serves on Ghana’s Economic Management Team (EMT) as Technical Advisor at the Office of the President, as well as, the Spokesperson to the Vice President of the Republic of Ghana, who chairs the Economic Management Team.