Regular readers of this page were puzzled when after weeks of projections by analysts of a final participation rate of between 60% and 65% in Ghana’s domestic debt restructuring exercise (DDE), the government triumphantly announced a “more than 80%” figure this afternoon.

We shared our understanding on Twitter: the government was determined to announce a high participation rate and would thus adjust any necessary definitions to suit the objective, principally by altering the participation rate equation. But why is the participation rate even important in the first place?

The only reason why a government, or indeed any debtor, would seek to restructure their debt is because times are so hard for them that they cannot pay according to the original terms. A need therefore arises to reduce the amount they are obliged to pay from time to time, whether in interest, principal, or both.

Thus, for a debt restructuring exercise, two things matter above all else: the average haircut amount and the participation rate. The participation rate, crudely speaking, is the ratio of A) the face value of the restructured debt (so, in this case, the new bonds) to B) the face value of the original, unpaid, debt (or outstanding principal). “A” is the numerator and “B” is the denominator, yielding a basic equation: A/B. The participation rate together with the haircut amount thus determines the overall debt relief, the amount of money saved by the debtor, in this case the government, as a result of not having to service its debt according to the original, more burdensome, terms going forward.

When setting out to restructure debt, a debtor is always conscious of the entirety of debt that can be restructured. This is what is referred to as eligible debt. Think of, say, an individual seeking to sort out their personal debt after losing their job. The bank may be willing to refinance the mortgage; a friend could be persuaded to forgive a wedding loan; but a leasing company may refuse any adjustment to the terms of the car loan. In such a situation, the mortgage and wedding loan constitute the eligible debt for that individual’s restructuring effort.

When Ghana announced its debt restructuring exercise on 5th December 2022, it pegged the eligible debt being treated in the announced DDE program at roughly 137 billion GHS ($11 billion).

When things started to get rough and the government was forced to amend the offer to entice more creditors, it amended the eligible debt to roughly 130 billion GHS ($10.4 billion).

After a series of extensions, belated concessions, and veiled threats failed to break the front of holdouts smarting from the bizarre and incomprehensible failure of the government to engage creditors well ahead of the formal launch of the restructuring exercise, panic began to set in.

Finance Ministry Mandarins hunkered down with the expensive suits from Lazard Frères, the government’s high end consultants in this exercise. Over copious beverages and after much brainstorming, punctuated by the occasional exasperated stutter, a plan started to form. Ghostly smiles etched on lip corners as its simplicity and sheer elegance became clear.

The plan was that the government will choose whatever eligible debt number it wants when it wants to present the results of the DDE and do so in anyway it wants. A sizzle of self-congratulatory buzz went round the room as the coup sunk in. No one leapt up to do a boogie-woogie, but the waltzing tunes from the adjoining antechamber became very audible very suddenly, stirring up some graceful head-bobbing.

Analysts who have been tracking every step of the DDE meanwhile kept issuing frantic updates to their audiences about the inevitability of a low participation rate, and thus a likely lackluster debt relief outturn. How naïve. They completely misread the entrails. When a tenacious government used to getting its way teams up with expensive, highly experienced, international consultants, a poor result is impossible!

Thus it was that later today, after the earlier press release, the government issued another press release. In it, the “over 80%” figure had crystalised into an “85%” participation rate.

On the second page, the abracadabra was presented in all its glory: the government has selected eligible debt of roughly 97 billion GHS ($7.6 billion) for the purposes of calculating the participation rate.

Talk of magical mathematics!

Knowing that a few nosey people might poke around the numbers, a perfunctory sop of an explanation was thrown their way. Essentially, the government has changed its mind about what debt was eligible to be restructured. At the tail-end of the exercise. End of story.

But even amidst the cursoriness, some analysts’ antenna went up. One terse justification of the lastminute reduction in eligible debt is a claim that some investors have converted their bonds into treasury bills. This could only have been done with the permission of the government. But why?

A theory doing the rounds is that it may be related to some swaps in which the government, most likely through the Bank of Ghana, is entangled. According to this theory, such derivatives are intertwined with a chunk of bonds such that any attempt to extend the maturity of those bonds would trigger serial defaults.

Whatever be the actual facts of the matter, and trust that they will be unveiled in due course, regular readers can rest assured that the debt relief analysis presented earlier still holds in its entirety.

First, using a more expansive bracket of government marketable securities (such as what was indicated in the debt exchange memoranda) as the denominator, one obtains a participation rate of between:

83 billion GHS (new bonds)/137 billion GHS (original eligible debt) = 60%

or

83 billion GHS (new bonds)/130 billion GHS (in-program amended eligible debt) = 63%.

So, analysts’ projections of a rate between 60% and 65% is far more robust than the government’s preferred 85%.

Does it matter?

Well, review the government’s own conduct following the last deadline of the exercise. One day to the final deadline, a junior Minister announced a participation rate of 50%. Once this was reported by the Press, friendly journalists were immediately briefed undercover to start circulating a new number of 70% plus. The junior Minister was promptly instructed to stop commenting further. Government affiliates in the media then took over the narrative. This morning, the number became “over 80%”. It has finally alighted at 85%. Clearly, there would be no need going through all these hoops if the narrative didn’t matter to the government.

The universal and enthusiastic reporting of the “over 80%” and “85%” participation rates in the mainstream press without any of the nuances above is clear evidence that the participation narrative matters greatly to the government and its key audiences.

For more specialised observers however (the ones most likely to pay attention to the kind of detail often explored in these pages), a more accurate number matters for its sharper reflection on the evolving fiscal picture.

The government’s PR successes are fundamentally irrelevant to such people.

Only the consequential analysis of the likely debt relief attainable from the just ended exercise matters. Keen observers are more likely to be concerned about the fiscal hole of over $2 billion in the government’s affairs that we insist can only be tackled by a sincere, independently supervised, expenditure “rationalisation” program because the current national budget doesn’t go far enough.

Of course, some secondary concerns also emerge when one considers the sequence of events so far. Some of the government’s explanations, self-serving though they are, also point to some disorganisation in the fixed income market. We have earlier warned about the potential error rates of settlement due to the rush, for instance in relation to unprocessed withdrawal requests by late holdouts. Some disgruntled people exposed to the debt exchange through the actions of fiduciaries, such as banks, have been baring their teeth. In these circumstances, litigation risks still persist, notwithstanding the formal end to the program.

The government itself concedes the need to tie the loose ends of the exercise gingerly, and has extended the settlement date to 21st February (to the ire of holdouts demanding a cure by 17th February of temporary defaults on the old bonds). It has unilaterally amended the exchange agreement to give it room to pursue additional exchanges and introduce mopping up instruments, among other imminent creative responses to the underwhelming performance of the debt exchange program.

In short, the government’s magic does not extend far beyond the spinning and yarning antics currently on display.

[This is a developing story. Updates may be made to this note as more information emerges.]

Regular readers would recall a recent tweet about whispers floating around Accra’s political alleys about the role of fixers and go-betweens in Ghana’s Vice President’s vaunted “Gold for Oil” initiative.

A bit earlier, we explored the merits and prospects of the whole Gold for Oil program in some detail.

When the above tweet was made, the Chamber of Bullion Traders, a gold merchandising lobby group in Ghana, was aggressively lobbying and briefing about their grievances over the Gold for Oil program and the harm it was causing to their interests.

The government’s decision to hoover up large quantities of gold from the small scale mining sector to support the gold and oil barter agenda could, according to their analysts, spell the end for some of their members and set in train a slow spiraling death for the entire private gold exporting sector.

It would seem that all the briefings and counter-briefings have roused anti-government media activists who have this weekend drawn first blood.

WADR, a Washington DC based non-mainstream media outlet strongly opposed to the current Ghanaian government has made a number of allegations corroborating some of the briefings swirling in the undergrowth of Ghanaian political chatter. Their allegations are backed by invoices and trade documents featuring actors who have been mentioned in confidential briefings as architects of the Gold for Oil program.

At the heart of the fascinating schema, as per the briefings, are two highly secretive and super-discreet investment bankers and dealmakers who also double as on-off financial advisors to former British Prime Minister, Tony Blair, himself a favourite Advisor to Ghana’s Vice President.

The two men – Reyhaan Aboo and Prashant Francis – are principals of London based Portman Partners and UAE domiciled Alphastream. They, especially Mr. Francis, were key enablers of Prime Minister Blair’s now dissolved, and once highly scrutinised, Firerush Ventures.

Alphastream’s key operatives are JP Morgan alumni who are well connected with the American investment bank’s powerful Ghanaian network, with members ranging from fund industry gurus to a former junior Finance Minister.

Alphastream, with primary investors in a UAE Sovereign Wealth Fund, brands itself as a multi-commodity royalty streaming company. The same business the ill-fated Agyapa entity attempted to enter.

According to the briefings, now corroborated by documents leaked to WADR, the Bank of Ghana has signed a secret agreement to sell $1.1 billion worth of gold and an unspecified quantity of silver through Alphastream to obtain dollars for procuring refined petroleum products.

It is absolutely unclear what specific value Alphastream adds in a simple gold export transaction but theories, mostly unsavoury, abound.

Regular readers would recall our recent tweet that Russia’s Litasco, under pressure from the EU’s expanding sanctions regime following the Ukraine invasion, has set up in the UAE and is exploring creative trades. Litasco is reported to have brought in the first consignment of gasoil blends from the Baltic Port of Vystosk under the Gold for Oil program.

Given Litasco’s reputation for “crude oil for refined products” deals, most notably in Nigeria, its involvement in Ghana’s barter program was unsurprising. Yet, impeccable sources insisted that they had not taken gold for payment.

The shadowy intrigues surrounding the very first transaction cast a harsh light on the opacity, lack of forthrightness, poor policy grounding, parliamentary sidelining, and zero accountability beclouding the entire Gold for Oil program.

Such murkiness could only deepen the clouds of suspicion and provide more fodder for the whispering campaign. One mystery above all drove the intense chatter: how had Litasco been paid?

The leaks to WADR shed light on this strand of the affair and ties some of the loose ends of earlier analysis. The money no doubt came from StoneX Commodities DMCC, part of the $1.7 billion a year trading wing of the StoneX Group, whose precious metals unit, especially the Girish Surendran trading desk, has been particularly aggressive of late in exploring multi-sided transactional solutions.

According to WADR, 502 kilograms of gold, out of an Alphastream quota of 18 tons, plus an unspecified quantity of silver have been freighted on Emirates airlines to StoneX’s refinery in the UAE.

Based on proforma invoice pricing, the total value of the shipments should amount to about $33 million. Roughly equivalent to the approximately $32.8 million that 41000 metric tons of Rotterdam gasoline blend would have cost on CIF basis using the relevant Argus pricing benchmarks.

In short, as many people have said in the past, the whole Gold for Oil program simply entails diverting gold from Ghanaian private sector players and selling through politically connected middlemen for dollars in Dubai. Then paying a Russian trading firm that already buys crude from Ghana and, finally, netting off in spot settlements. Far from the revolutionary gameplan of recent government narratives. At first approximation, the scope for backhand fees and hidden premia is, unfortunately, massive.

Had this convoluted ring-a-ring-a-roses been equivalent to a conventional oil trade intermediated by the usual Ghanaian Bulk Distribution Companies (BDCs), we could have put the whole thing down to the Ghanaian politician’s need for populist dramatics. But the multiple layers of related parties playing middlemen for a cut and the thick cloud of opacity ring serious alarm bells.

Some of the claims of WADR are hard to follow and the organisation’s key activists use unconventional scales and conversion rates (examples: suggesting that “129 pounds = 1kg” and that 1 pound of local gold costs 5000 GHS, both of which are erroneous). But the general concerns about shadowy brokers have been raised by others far more steeped in the commodities industry, and fears of potential losses for Ghana are reasonably grounded.

The slow rate of gold mobilisation, no doubt funded by cash printing with inflationary potential, and the multiple hoops of exchange rate and credit exposures, all come together to suggest a tottering wreck of a scheme that may be too clever by half. There is, after these revelations, no rational basis for holding on to a belief in the scheme strengthening the Cedi or leading to lower fuel prices at the pump.

Before further leaks and more confidential briefings ensue, we strongly urge the government of Ghana to publish every piece of information relating to the various roles played by the Bank of Ghana, Precious Minerals Marketing Corporation, Litasco, StoneX, Alphastream, and the secret local gold aggregator muscling out the established gold traders and exporters in this strange procurement scheme.

Why should every policy of government become a magnet for drama and controversy?

Word on the street is that Ghana’s drama-filled debt restructuring/exchange program (“DDE”) saw between 60% and 65% of all eligible extant marketable government securities (simply, “bonds”) tendered in by their holders in exchange for new bonds offering lower average interest and longer average repayment tenures. Investors accepted losses of between 19% and 47% instead of the 55% to 88% (depending on inflation & discount rate assumptions) they would have suffered under the government’s original December 5th 2022 plan.

Whilst the outcome is perfectly in line with analysts’ expectations, the government had held out hopes of hitting its 80% non-binding target, and postponed the program 5 times to increase chances of doing so. Deniable leaks from government sources to selected media in Accra pegging participation at 70% are considered less credible, and at any rate don’t change much by way of effect.

After a week that saw pensioners, some in wheelchairs, accost Finance Ministry officials and a former Chief Justice declare the entire exercise a complete illegality, the DDE architects can breathe a sigh of relief even if the participation rate and debt relief outcomes, the worst in modern world history, are not exactly stellar.

	Country	Restructuring Scope	Year Completed	Duration	Participation Rate
1	Ghana	Domestic	2023	2.2 months	60% to 65%
2	Argentina	Domestic	2020	11 months	99%
3	Barbados	Domestic	2018	4 months	100%
4	Belize	International	2017	5 months	100%
5	Chad	International	2018	17 months	100%
6	Ecuador	International	2020	5 months	100%
7	Grenada	Domestic & International	2015	32 months	100%
8	Mozambique	International	2019	33 months	99.5%
9	Ukraine	International	2015	11 months	100%
10	Uruguay	Domestic	2003	6 months	99%

Still, as we have argued elsewhere, the DDE was the easiest, and not even the most politically costly, way for the government to raise a large amount of money. At a 65% participation rate, the government will pay roughly 6 billion GHS on the tendered debt versus the roughly 17 billion GHS it would have paid on the old instruments in 2023. In subsequent years, the government’s payment obligation will almost double, but for the biggest creditors, this increase in payout will be deferred until after the 2024 elections.

At first approximation, the DDE thus represents a transfer of roughly 11 billion GHS from the private sector (and, minimally, the Bank of Ghana) to the government in 2023 alone, an amount higher than what the state takes in from external VAT (~8 billion GHS), and National Health Insurance and GETFund Levies (~9.3 billion GHS); and only a little lower than revenues from import duties (~14 billion GHS).

Given the disrespect with which they have been treated, the private sector have been most deferential to the government by forgoing such a large amount of money. As we have repeatedly said in these pages, Ghana’s DDE was by far the most unorthodox the world has seen since Argentina’s much derided program in 2000. The country seems to have taken a leaf from Argentina’s repeat game in 2020, and then carefully overdone the theatrics.

No country in the world has ever launched a DDE or any sovereign debt restructuring program of this magnitude without extensive informal consultations with major creditors ahead of the official commencement of the program. There is a reason why the average time for conducting a debt exchange in the last two decades is in the range of 11 months. People like to refer to Uruguay’s program in 2003, which officially took 7 weeks from formal launch to settlement. However, the launch was preceded by more than three months of intensive discussions with all the key creditors.

Ghana’s decision to rush through the process and string together a series of unilateral deadlines on a take it or leave it basis, whilst reflective of the governing style of the current government, was thus completely unprecedented.

It had led many to wonder whether the playbook created by Lazard Frères’ Eric Lalo and Michele Lamarche, which has been in use during this whole enterprise was worth the multi-million dollar advisory fees.

Of course, this being the first time an African country has dared to restructure its domestic bonds, perhaps Lazard can be excused for their lack of sparkle. Those in the know do say that Lazard was quite effective during Ivory Coast’s restructuring of Brady Bonds in 2009 and that the subsequent faltering in attempts to establish a regional base in Abidjan owe more to the vicissitudes of the sovereign debt advisory market than to any failings of substance.

Yet, watching the Lazard Sovereign Advisory method that Ms. Lamarche, Monsieur Eric Lalo and Monsieur Matthieu Pigasse honed over decades of practice flounder in the midst of all the drama we have been served in the last couple of weeks was a sight to behold for many analysts.

It is true that Lazard sovereign debt restructuring advisors don’t shy from combat when that is necessary to score an important point. But the decision to walk back on previous commitments made to exempt pension funds and the tactless handling of the pensioner concerns, such as waiting for these elderly citizens to start issuing threats before engaging seriously, were not signs of spunk. They smacked, instead, of clumsiness.

Which is why some observers feel that Lazard was not allowed by its Ghanaian principals to bring all those years of advising Greece, where far more complex matters were afoot, and Ecuador, widely praised for the sophistication of the stakeholder engagement process, to bear.

Such a view would not be altogether sound though in view of some of the rather hairy spectacles Lazard got entangled in during Argentina’s 2020 post-default negotiations with creditors.

Whatever be the case, whether it was Lazard that pushed these hardball tactics or the Finance Ministry, the ball remained throughout the period in the court of the wider government of Ghana to ensure alignment between this narrow debt restructuring program and the broader political economy of getting Ghana away from the brink of the economic abyss it is currently staring into.

Let us not mince words here, the admission that the Bank of Ghana had to print money equivalent to roughly half the government’s domestic revenue in order to service debt over the last year and stave off a default has thrown the country’s overall fiscal situation into very stark relief. Analysts are now even clearer in their forward view that debt relief of 11 billion GHS a year, as delivered by the just-ended DDE, is far from sufficient to get Ghana back on the path to macrofiscal stability.

The country is now literally using short-term treasury bills at nearly double the cost of the bonds it says it can no longer afford to finance day to day government operations. In no time, all the gains from the DDE debt relief will be wiped off simply from the escalating costs of fresh domestic borrowing. $1 billion from the IMF this year will certainly not substitute for the $4 billion in curtailed international inflows. Greater relief is urgently required.

Moreover, judging from the posturing of China, it does not look likely that a quick Paris Club deal can be arranged in the government’s preferred March timeframe via the Common Framework. The IMF may have to waive the bilateral debt restructuring requirement if the plan is to get the much coveted board approval for Ghana’s provisional staff agreement in the Spring. At any rate, bilateral debt relief should provide something in the range of $100 million or so a year, a clearly insignificant amount in the wider scheme of things.

If the analysis above is correct, then the next big drama ahead for Ghana is swift and smooth Eurobond restructuring talks with its external creditors. Reports that Franklin Templeton participated in the domestic debt exchange are encouraging but they do not completely assuage concerns about the coolness shown by many other offshore investors towards the just-ended DDE.

After Ghana chose to suspend servicing its Eurobond debt without so much as the ritual courtesy of applying for consent, external bondholders like Pimco, Fidelity, Goldman Sachs, and BlackRock have had to signal, albeit subtly through well-placed hints, that they will not be walkovers going forward.

The balance of probabilities incline in the direction of moderately tough negotiations in respect of the government’s reported demands for a moratorium on servicing its Eurobond debt. We are pessimistic of a total moratorium request being accepted by Ghana’s Eurobond investors. They will be taking cue from how Ghana’s refusal to build proper consensus ahead of the DDE through extensive consultations forced the sovereign to consent to some of the most creative pari passu violations in world debt default history.

Ghana’s goal of a billion dollars of debt relief in 2023 from Eurobond restructuring is thus ambitious and, in light of the DDE performance, possibly unattainable. Should the government succeed in wringing out about half of that, the country still faces a $2.5 billion dollar hole that must be addressed through other forms of fiscal adjustment besides debt restructuring. It bears mentioning that this is a conservative figure.

In these circumstances, the original debt restructuring program would clearly need supplemental strategies. In the recent past, we have discussed plans to accelerate treatment of non-marketable debt, to tackle the debt of state-owned enterprises like Cocobod and the Electricity Corporation of Ghana (ECG), and to explore ways of dealing with mounting energy sector debts. There is aggressive language coming from some government quarters about forcing power producers to accept cedi conversion of forex liabilities among others.

The downside of all this uncertainty is the prolonging of the souring plight of the financial sector. Despite repeated assurances of a swift recovery of enthusiasm in the domestic bond markets, the high holdout rate blocks the government from seeking to apply exit amendments and other tactics to damage the old bonds in favour of the new bonds.

No doubt government advisors are even at this moment contemplating all manner of devices to seek to penalise holdouts. They would do well to exercise caution. The dramatic interventions of the former Chief Justice were meant to send a clear message: judicial elements who may have been personally affected by the exercise shall take a dim view on any legally dubious punitive measures brought against holdouts.

Consequently, the high quantity of circulating high-yield old bonds will exert competitive pressure on the low-yield new bonds even as the high interest rate environment contributes further to depress value. Consequently, the likelihood of a ratings improvement for the new bonds is low, as are the prospects of market recovery in 2023.

Another interesting angle is the implicit seniority that has been introduced among government creditors, with the biggest financial players at the bottom of the heap. The unintended consequence is that smart banks and insurance companies will reduce their holdings of all government debt, Including treasuries.

Smart pension funds can take advantage of the situation by creating products that harness their newfound seniority to give risk averse market participants safe exposure. But it is unlikely that this development alone will do much to shift asset ownership power in Ghana’s financial industry to pension funds, given all their other constraints.

The net effect, in the short term at least, therefore is a lowering in institutional demand for government securities and sustained upward pressure on government borrowing rates.

As we have said in preceding paragraphs, the government’s timeline of an IMF board approval of its staff level agreement in March 2023 increasingly looks more and more unrealistic since successful Eurobond restructuring is critical in lending credibility to the debt sustainability program, which is a vital precondition for even a moderately successful IMF program. The real question is whether approval in the Spring, i.e. by May, is feasible.

Of course, the IMF precondition only requires good faith efforts to restructure the debt not sterling outcomes. And, given where we are, the IMF is likely to accept some lacklustre debt relief outcomes in the medium-term. Nonetheless, such pragmatism would need to square with maintaining the credibility of the program. Meaning that acceptance of lack-lustre results in order to preserve a timeline of Board approval by the time of the Spring meetings (i.e. by mid-April), which is the most aggressive schedule feasible, has to be weighed against market perceptions about the viability of the fiscal treatment. Otherwise, a board approval announcement will give the fiscal indicators only a short-lived boost as was seen in December 2022 after the announcement of the provisional staff level agreement.

Supposing that a mid-April board approval is reached on the basis only of “good progress” with the external restructuring effort but before concrete debt relief assurances are secured, the IMF will have the option of securing Board approval but then making any tranche-one disbursement contingent on a successful program review later in the Summer of 2023.

In short, the next six months will require deft management of the country’s highly limited forex reserves and revenue inflows given massive pressure on both. Any slip, such as forex market adventurism, will see a return to the twin crisis of skyrocketing exchange rate depreciation and inflation spirals by May. The next twelve months, as a whole, will be shaped by market perceptions of the credibility of the IMF program.

If the government sticks to the same approach that it used in the domestic debt exchange, and continues to make the economic recovery effort a mere partisan-administrative activity, instead of one based on broader consensus, not even an IMF board approval in the Spring will correct the course of the fiscal crisis and avert a full-blown economic catastrophe.

To repeat for emphasis, the government must not:

• fail to mobilise a serious national consensus behind a short- to medium- term austerity plan;
• dilly dally in presenting a credible strategy of how it will cut public expenditures to plug the fat fiscal hole, by shrinking at least 25 billion GHS of its expenditure sheet; and
• ignore calls to establish an independent “value for money” and “monitoring and evaluation” program with a remit spanning across the entire set of budgeted government programs.

Otherwise, Ghana should brace for a very rocky journey through 2023 and 2024.