The government of Ghana’s domestic debt exchange programme (haircut) has been scheduled to be launched on Monday, December 5, 2022 and it has raised a lot of concerns among Ghanaians especially those with investments.
This was decided after numerous meetings and engagements with key stakeholders including Bank of Ghana and Ministry of Finance and Economic Planning.
The Bank of Ghana also confirmed the Ghana Debt Exchange (GDX) in its Monetary Policy Report issued on November 28, 2022.
If you are confused about the details and how it affects you and your investments, this article will help you understand the nitty-gritties of the current economic debt restructure.
How did Ghana’s Economy Get Here?
There have been many speculations about what caused this economic turmoil where some citizens attributed it to the mismanagement of the economy by the government officials.
As much as that can contribute to it, there are other major factors that are known to cause it.
One thing I can say for sure as a major cause is the depreciation of our local currency. Exchange rates fluctuations have been proven to pose risks to investments.
For instance, If a bond is issued in Ghana cedi, the rate of the dollar versus the currency can positively or negatively affect your yield. In other words, when the Ghana cedi is strong when compared to the dollar, your returns will be positively affected and vice versa.
Ghana’s Domestic Debt Exchange
The Hon. Minister for Finance, Hon. Ken Ofori-Atta announced on Sunday, 4th December, 2022 about government’s intention to roll-out the debt exchange programme.
As a result, existing domestic bonds as of 1st December, 2022 will be exchanged for a set of four new bonds which will mature in 2027, 2029, 2032 and 2037. That is, 5 years, 7 years, 10 years and 15 years from now.
The annual coupons of these new bonds will be set at 0% in 2023, 5% in 2024 and 10% from 2025 until maturity.
What are Debt Securities, Bonds and Coupons?
A debt security is an entity that can be used to raise capital and can be bought or sold between two parties with defined terms such as interest rate and maturity.
In simple terms, debt securities are financial benefits that entitle owners to a flow of interest payments and as such, borrowers are required to repay the principal amount borrowed regardless of what happens.
Instances of debt securities include government bond and corporate bonds.
This is why the Minister for Finance in his report mentioned that there will be no haircut on the principal of bonds which means principal amounts used as bonds are intact and will yield the interest based on the new annual coupons.
Individual holders of bonds will also not be affected as well.
If you don’t understand coupons, it refers to the annual interest rate paid on a bond, expressed as a percentage of the value and paid from issue date until maturity. For example, if there is a Ghc1,000.00 bond with a coupon of 8%, payment of Ghc80.00 will be made in a year.
This means that, annual interest payment on bonds will not be paid next year, 2023 because of the 0% coupon but will be paid the subsequent years depending on the coupons mentioned above.
Other Affected Investments
The Treasury Bills are also completely exempted and all holders will be paid the full value of their investments on maturity.
The investments that have been affected by the debt restructuring includes Mutual Funds, Fixed Deposits and Exchange-Traded Funds.
Hon. Ken Ofori-Atta mentioned that the Bank of Ghana, the Security & Exchange Commission, the National Insurance Commission and the National Pensions Regulatory Authority will ensure the smooth operation of the debt restructuring.
Your Future Investments Plans
Drawing conclusions from the current economic turmoil and debt exchange programme, investments in general for the next five years will not be recommended.
If you have investments already and don’t have plans for it, you can decide not to touch it but do not add or continue to to pump extra funds into it.
Another alternative is to use the last dignity left of your current investments to start a business or if you can’t start a business on your own, give it to that family friend or acquaintance who needed some capital to start a business. You’ll be a co-partner in that business and might yield huge dividends in the near future.
Credit: investopedia.com
