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Conflict of interest: Hank Paulson comes to Ghana

Whenever someone with significant working experience and investments in the financial sector is appointed as finance minister or becomes president, suspicions of conflicts of interest abound.

By By Atsu Amegashie

This is finance minister, Ken Ofori-Atta’s situation. Kwabena Duffuor, being an owner of a bank, was in a similar situation when he served as finance minister from 2009 to 2012. He got a free pass perhaps because he was respected within NPP circles (I am speculating). There were similar allegations of conflict of interest when Hank Paulson, a former CEO of the investment bank, Goldman Sachs, was appointed by George Bush as finance minister (treasury secretary) of the USA. He was accused of bailing out his friends on wall street  in the aftermath of 2008 financial crisis (e.g., this 2009 New York Times article: http://www.nytimes.com/2009/08/09/business/09paulson.html)

A conflict of interest does necessarily imply wrongdoing. One needs much more evidence, although ideally conflict of interest situations must be avoided. For example, according to the NYT article above, “Before he became President George W. Bush’s Treasury secretary in 2006, Henry M. Paulson Jr. …. not only sold all his holdings in Goldman Sachs, the investment bank he had run, but also specifically said that he would avoid any substantive interaction with Goldman executives for his entire term unless he first obtained an ethics waiver from the government.”

Some people have compared the 9.25% 5-year Eurobond in September 2016 to the recent 15-year 19.75% bond in 2017. The 9.25% bond in 2016 was a Eurobond. Ghana is servicing the debt (paying investors) in dollars. The NPP’s 19.75% bond is a domestic bond. Ghana will service the debt (pay the investors) in cedis. Investors require a smaller interest rate when debt is issued in dollars but demand a higher interest rate when debt is issued in cedis because the dollar has a lower risk (more stable, lower inflation rate in the USA) while the cedi has a higher risk (not stable, higher inflation rate in Ghana).  In addition, the 19.75% bond is callable bond which means that the government can recall the bond and, in effect, cancel its contract with bondholders before year 15 (i.e., before the year of maturity). When this happens, it imposes a cost on investors hence the bond issuer (Ghana) must compensate bondholders with a higher interest rate if it has this call provision in bond contract. So, relative to the 9.25% Eurobond,  the interest rate on this domestic bond is higher for three reasons: (1) it was issued in cedis, (2) it is a callable bond, and (3) it has a longer tenor (15 years versus 5 years). Therefore, the 19.75% interest rate on the domestic bond is not unusual. Not at all. In October 2015, we raised $1 billion at 10.75% for 15 years but that required World Bank guarantee of $400 million).

In its press release, the Ministry of Finance stated that it “… successfully issued 15 and 7 year bonds with the same coupon of 19.75% …”. It is surprising that a 15-year bond and a 7-year bond have the same coupon (interest) rate (i.e., technically, a flat or horizontal yield curve). Typically, the bond with the shorter tenor (fewer years to maturity) has a lower interest rate (i.e., a rising yield curve). If the 15-year bond was optimally priced, one would argue that the 7-year bond was overpriced. But is this a problem? I don’t think so because 19.75% for a 7-year domestic bond is a very good deal for Ghana. The Bank of Ghana has very good data on interest rates for our short-term domestic bonds: 3 months, 6 months, and one year). On November 7, 2016, the interest rate was more than 22% and it is currently more than 16%: https://www.bog.gov.gh/markets/treasury-bill-rates

When the interest rate on bonds is the same (or almost so) regardless of time period (tenor) of the bonds, we say that the yield curve is flat. A flat yield curve is not unusual. For example, according to a 2017 article in the Financial Times titled “Flattening US yield curve”,  “The difference in yield between 10-year and three-month Treasuries has dropped to 1.38 percentage points, from 1.56 pp at the start of April and as high as 2.09 pp in December. That places the spread at its lowest level since October 5, according to Bloomberg data.”

There is no doubt that Franklin Templeton has been buying Ghana’s bonds for a long time. A deputy minister of information, Kojo Nkrumah, claims that it’s been doing so since 2006. A 2014 article in the Economist Magazine stated that Templeton bought Ghanaian bonds in 2013: http://www.economist.com/news/finance-and-economics/21635015-controversial-strategy-bargain-hunting-bond-trader-where-others-fear

Is there evidence that an investor offered to buy our bonds at a rate below 19.75% with same tenor and call provisions but his offer was rejected? That is a scenario under which I can think of someone making an illicit gain. But I doubt it, especially given the high historical rates for our short-term bonds.



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