Risks around government bonds will linger, signalling new realities for bondholders – Vish Ashiagbor

The Country Senior Partner at PwC Ghana, Vish Ashiagbor has shared his thoughts on the ramifications of Ghana’s Debt Restructuring Programme, highlighting the significant risks now associated with government bonds.

Over the past few months, the Domestic Debt Exchange Programme (DDEP) has reshaped the economic landscape, challenging long-held assumptions about the security of government instruments.

The programme, aimed at restructuring Ghana’s debt to ensure fiscal sustainability, has had profound implications.

The financial expert Vish Ashiagbor said traditionally, government bonds were considered virtually risk-free, backed by the sovereign guarantee that the state would always be able to meet its debt obligations.

This perception, he said, has been deeply ingrained in financial markets worldwide, where institutions and individual investors alike view government bonds as a safe haven.

However, as Mr Ashiagbor pointed out, this belief no longer holds true in the wake of recent developments.

“The thinking behind that is a sovereign generally doesn’t default and has the ability to make resources available to service its debt. We know that that’s not 100% correct, not just from my own experience, but from other jurisdictions like South America and Greece,” he stated.

These examples illustrate that even governments can falter under the weight of unsustainable debt levels.

The DDEP, initiated by the Ghanaian government, aims to restructure its domestic debt by exchanging existing bonds for new ones with longer maturities and lower interest rates.

This move is intended to reduce the immediate debt servicing burden on the government, providing some fiscal breathing room.

However, it also means that investors holding these bonds are now facing significant changes to their expected returns and timelines.

“Financial institutions, pension funds, banks, and individual investors who have traditionally relied on government bonds for stable returns are now exercising greater caution,” Mr Ashiagbor noted.

He added, “Those who typically invest in government bonds, which are basically the financial institutions, whether they are pension funds or the banks or even individuals or people with a little bit of money they’re trying to put aside for the future, there’s now a great deal of caution around exposure to the bonds.”

The heightened risk associated with government bonds is a new reality that investors must grapple with.

“There’s a lot of risk now being attached to government instruments. And that’s just the way I think it’s going to be for some time,” Mr Ashiagbor said.

This shift necessitates a reassessment of investment strategies, where risk appetite plays a crucial role.

Investors who have been affected by the restructuring will likely be more cautious in their future engagements with government instruments.

Restoring confidence in government bonds will be a gradual process, heavily dependent on the government’s ability to adhere to its commitments and demonstrate fiscal responsibility, Mr Ashiagbor stated.

“You need to build that credibility, and it takes time to restore that credibility to the market. And that’s what I mean by it probably will take some time as to how long it just very much depends on how well we progress against actually delivering what we’ve committed to delivering,” Ashiagbor stressed.