Ghana has stopped making payments on its external debts to bondholders, other commercial lenders and foreign governments, making it the latest deeply-indebted developing county to fail to make good on its foreign obligations.
In a statement on Monday, the country’s finance ministry announced “a suspension of all debt service payments” on external government debts, including foreign currency bonds, commercial loans and “most of our bilateral debt”.
It underlines the extent of debt distress among developing economies, especially in sub-Saharan Africa. About 60 per cent of lower-income countries have debts that are unsustainable or in danger of becoming so, according to the IMF and the World Bank, which has warned of a wave of impending debt defaults. Sri Lanka earlier this year defaulted on external debt payments, while Zambia missed payments in 2020.
Ghana’s finance ministry said the country faced a “major economic and financial crisis, and its attendant social challenges”, and added that “global risk aversion triggered large capital outflows, a loss of external market access and rising domestic borrowing costs”.
Sharp increases in global interest rates this year, along with a stronger US dollar, high rates of inflation and other disruptions caused by the pandemic and Russia’s war in Ukraine have made it increasingly hard for many developing countries to meet both foreign and local currency debt repayments. Many have taken on new debts since the start of the pandemic to finance an expansion in public spending.
Ghana this month announced an exchange of local currency government bonds with a value of more than $11bn that will sharply reduce interest payments to its domestic creditors, mostly local banks, pension funds and insurance companies.
Last week, it reached a preliminary agreement on a $3bn bailout from the IMF that the fund said would be dependent on receipt of financing assurances from Ghana’s external creditors and on progress on the domestic debt exchange.
World Bank data show that Ghana owed more than $13bn to foreign bondholders at the end of 2021, the most recent aggregated data available, and $3.2bn to foreign governments, including China and Korea.
Its total external public and publicly guaranteed debts were $27.4bn, including about $5bn in short-term debts not affected by the standstill. Debts owed to multilateral lenders are also exempted, including about $3.4bn in IMF credit and $4.7bn owed to the World Bank.
Kevin Daly of emerging market specialist fund manager Abrdn said a default on Ghana’s foreign debts had been expected for some months and was largely priced into its sovereign bonds.
A bond maturing in 2049 with a coupon of 8.627 per cent that was trading at more than 100 per cent of its face value at the end of 2020 has since fallen to less than 33 per cent, with most of the fall coming this year, according to Refinitiv.
Foreign bondholders are expected to announce the formation of a creditor committee in the coming weeks, the first step towards negotiating a restructuring of Ghana’s eurobond debts.
A separate committee of bilateral creditors is also likely. China’s rapid rise as a major bilateral lender this century has given it an increasingly large role in debt workouts. This year it agreed to co-chair with France a bilateral committee to help restructure Zambia’s foreign debts but progress has been slow.