“It will be very difficult for fund managers to participate in bonds”; government knew it couldn’t repay debt – Dr. Sam Mensah
Finance and capital market expert, Dr. Sam Mensah, is warning of the repercussion of the debt exchange programme, saying, fund managers may find it difficult to participate in government bonds going forward.
According to him, the basis of all business transactions which hinges on trust have been broken.
In a write up dubbed “The Bond Exchange and Further Matters Arising”, the former Financial Sector Advisor at the Ministry of Finance said in the corporate world, when it becomes necessary, bondholders or those holding any type of debt may exchange them for different classes of preferred and common shares.
“If Ghana has any assets, such as ownership in One District One Factory projects, mines etc., it would be better to exchange these bonds for an equivalent in such assets rather than upsetting a budding financial industry”, he explained.
“It will be very difficult for fund managers to participate in government bonds going forward. Trust, the basis of all business transactions, would have been broken”.
He further took a swipe at government, saying, how was the government planning to pay the interests and principals of the bonds it was issuing when it knew it cannot repay those debt instruments?
“So what really happened? How was the government planning to pay the interests and principals of the bonds it was issuing?”
“How do you keep borrowing when you know you can’t repay the debt, and you know you are not the US government?” he added.
He also expressed concern about government focus on cash inflows but not cost cutting too.
“Why is it that the government focuses only on cash inflows but not cost cutting too? Cost cutting is a very effective cash flow management tool. Cut the ex-gratia, cut the number of ministers, cut the number of gas guzzling SUVs, and … the most important….cut down on corruption!!!!!!!”, he pointed out.
Debt exchange put financial industry at risk
Dr. Sam Mensah also expressed worry about the impact of the debt exchange on service providers such as trustees, custodians, and fund managers.
According to him, the ‘haircut’ applied on bond investments will hurt the financial industry significantly
“Let us assume that you have a ¢100,000 portfolio before the debt exchange. After the exchange, the coupon drops to zero and maturity is extended, which reduces cash flow. Therefore, the price of the bond falls. The market estimates that a typical portfolio will lose 30-40% of its value when it is exchanged. Therefore, your once ¢100,000 portfolio is now valued at ¢60,000. This is the basis on which the unions [labour] were fighting the bond exchange. Tier 2 and 3 pensions would’ve been decimated”.
“Let’s also look at the impact on the service providers. These include trustees, custodians, and fund managers. All the service providers earn fees calculated as a percentage of the value of assets under management. If the value of these assets drops by 40%, revenues of the service providers will also drop by about 40%. Many of the service providers will go out of business because of their inability to cover overheads. Others will have to lay off employees. At the last count, there were 25 corporate trustees, 39 pension fund managers, and 17 custodians. A whole industry may be at risk”, he explained.
Continuing, he said this disaster may have been partly averted by the exclusion of pension funds in the exchange, but the exclusion is problematic.
“How do we meet the International Monetary Fund’s debt sustainability targets if pensions (which now hold 25% of government bonds) are excluded? Clearly, there has to be some give and take so that pensions will participate. Otherwise, we can say goodbye to the IMF agreement. Taking a national perspective, it’s premature to celebrate the exclusion of pensions”, he added.
Source: Ghana News
