Sovereign Participation in the International Bond Market: The Ghana Case

1. Sovereign Participation in the International Bond Market: The Ghana Case Sam Mensah Technical Advisor Ministry of Finance & Economic Planning Ghana Annual Conference of ASEA October 30, 2007

2. OUTLINE BORROWING STRATEGY • Why Ghana wanted to issue bonds on the international capital market • Which factors helped Ghana to tap international market • How Ghana managed a successful Issue GHANA’S STRENGTHS SUCCESSFUL ISSUING STRATEGY

3. Why Eurobond? • Historical over reliance on concessional debt from multilateral sources especially IMF, World Bank • Concessional Debt • Long gestation period – conception to disbursement can take up to 3 Years; delays can be very costly in economic terms • Amounts too small to meet infrastructure requirements for accelerated growth • Conditionalities may not be consistent with national priorities • High transaction cost – appraisal, review missions, monitoring and evaluation tie up significant national resources • But terms are generous • Need to diversify funding sources to mitigate disadvantages of concessional debt

4. Ghana’s Strengths • Reforms undertaken since 2000 have transformed Ghana’s economic condition and prospects • Stable political conditions needed for reforms to succeed • Support from Ghana’s international partners have reinforced the positive steps taken at home • Macroeconomic and social indicators are pointing in a positive direction • Vulnerabilities remain but the strategy is in place and the foundation has been laid for Ghana’s ascent to middle income status by 2015

5. Ghana's Debt Dynamics

6. Improved external accounts External debt service chart 18

7. Comparable Rated Sovereign Peer Group (2006) Debt Management Comparables • Ghana performs well against its rated sovereign peers Source: Fitch and EIU Reports 5

8. Successful issuing strategy for a debut issue • Elements of successful issuing strategy • Political will at the highest levels • Competent transaction team • Structuring the Offering • Telling the Ghana Credit Story

9. Transaction Team • Lead Managers • Citigroup, UBS • Co-managers (all Ghanaian) • Databank, EDC Stockbrokers, New world Investments • Issuers Counsel • International: DentonWildeSapte (Lead); Cravath, Swaine & Moore (U.S, Law) • Local: ILC • Lead Managers Counsel • International: Clifford Chance • Local: JLD & MB • 7-member MOFEP/BoG Support Team

10. Timeline /Milestones

11. Transaction Highlights On the 27th of September 2007, Citi (and UBS as joint bookrunners) priced the landmark US$750 million 10-year inaugural international bond issue for the Republic of Ghana, despite very volatile prevailing market conditions. The transaction generated in excess of US$3 billion in global demand with 158 investors participating in the orderbook. Transaction Summary Final Terms: New Issue • On September 27th 2007, the Republic of Ghana issued its debut US$750 million 10-year Reg S/ Rule144A bond. This transaction was priced following a 6-day investor roadshow in the US (New-Port Beach/LA, NYC and Boston) and Europe (London, Frankfurt/ Munich and Zurich). • The orderbook grew in excess of US$3 billion, this was over 4 times subscribed with 158 orders from investors globally. • The sovereign issuer was able to achieve the maximum size of US$750 million that it required at the tight end of the initial guidance of 8.50% to 8.75% thanks to a high quality and well-diversified order-book. 1

12. The international marketing effort through the US and European roadshow paid off, evidenced by the the diversity of the orderbook and the high quality of the accounts. Bookbuilding Evolution Roadshow schedule Timeline Marketing the Transaction Offering Circular Sales Force Memo Bloomberg Presentation Key Selling Points 2

13. In spite of the market volatility and heightened risk aversion sentiment, Ghana was able to achieve more than 4 times subscription, with investors eager to take part in a transaction by a rare Sovereign Issuer. Books ClosedTotal Orders:158 Books Open Roadshow Commences $3.3bn Transaction Priced: Mid-swaps + 325 bps Deal Announced $750m Initial Guidance Set Book Building Process Order Book Analysis Orders Size 3

14. 158 accounts participated in the deal with the majority of the issue sold into the US and Europe. The final order book was above US$3 billion with investment/ asset managers representing 65% of the investors along with a significant participation by hedge funds. Investor Distribution Orders Geographic Distribution Orders by Investor Type Allocations Geographic Distribution Allocations by Investor Type 4

15. Ghana makes international bond debut The Republic of Ghana on Thursday became the first west African sovereign state to enter the international bond markets, selling a benchmark issue to raise $750m. The deal met almost $3bn of demand and could, bankers say, be the first of a number from African countries that have benefited from debt relief. The sale underscores a continuing robust appetite among some investors for high-yielding assets, particularly in emerging markets - in spite of the turmoil that has affected sentiment in the wider financial markets. The 10-year bond was sold at par to yield 8.5 per cent, at the tight end of initial price guidance, according to Citigroup and UBS, which managed the deal. Bankers said the bonds went to a wide range of investors, with about 40 per cent going to the US, 36 per cent to the UK and the rest to Europe. "We have been preparing for this day for the past two years, and the process has been hard work," said Kwadwo Baah-Wiredu, Ghana's minister of finance and economic planning. "We have repositioned Ghana from being a very highly indebted country to one with a healthy, expanding economy. "We are the first African country other than Egypt, Morocco and South Africa, which has made it on to the international market." The minister said the proceeds of the bond would be used to improve Ghana's infrastructure, including the building of roads and the energy sector. "Ghana has emerged as a trend setter in sub-Saharan Africa, having entrenched political stability and put in place macroeconomic policies that have secured it extensive external debt relief under a series of international creditor-driven initiatives," Paul Rawkins, senior director in Fitch's Sovereign rating team in London, recently said. A number of other African governments including Nigeria, Kenya and Zambia are considering issuing sovereign debt on the international bond markets. Ghana is rated B+, in the speculative grade category, by Standard & Poor's and Fitch. Published September 27, 2007 By Joanna Chung Press Coverage: The Republic of Ghana 5

16. Ghana sees huge demand for debut 10-yr Eurobond Ghana sold a $750 million Eurobond Thursday, with order books testifying to abundant appetite for the debut bond from the West African country and possibly for future issues from the continent. The 10-year dollar bond was sold at par to yield 8.5 percent, the tight end of the guidance given on Wednesday, lead managers Citi and UBS said. The book size was almost $3 billion with about 40 percent placed to U.S. investors, 36 percent with UK investors and the rest in Europe, officials with the banks said. About 158 accounts bought into the deal, they added. "We are very happy. This is the first African country other than Egypt, Morocco and South Africa, which has made it on to the international market," Ghana's finance minister Kwadwo Baah-Wiredu, in London for the bond sale, told Reuters. "We had investors from all over the world and it shows Ghana's story is good. I hope other African countries will be able to succeed as well," he added. The minister said the proceeds of the bond would be used to improve Ghana's infrastructure and pledged to continue with reforms that have helped speed up economic growth. Ghana is rated 'B+' by Standard & Poor's and Fitch, a distinctly speculative grade. The Ghana deal is also significant in that it marks the first foray into global bond markets for a country that had its debts written off as part of a historic 2005 $40 billion debt relief effort for Highly Indebted Poor Countries (HIPC). "This is the first instance when a country post-HIPC is tapping international capital and we expect it to be the first of many bond issues from African countries," said Razia Khan, economist at Standard Chartered Bank in London. Ghana's success comes a day after Turkey sold $1.25 billion in 2018 Eurobonds, which were three times oversubscribed. The two deals how that in spite of the global liquidity squeeze that is forcing central banks to pump in billions of dollars into money markets and make emergency loans to banks, there is cash on hand to invest in high-yield assets. "There is appetite for sovereigns," said Kaushik Rudra, emerging debt strategist at Lehman Brothers. "People are differentiating between corporates and sovereigns and have more confidence in the sovereign outlook than the corporate outlook.“ Analysts say the order book testifies not only to the attractiveness of the 8.5 percent yield but also to growing confidence in Ghana's economy, which the finance minister said would grow at 6.5 percent this year despite floods and drought. A recent oil discovery may help consolidate growth. World prices for cocoa and gold, its other main exports, are high. "The economy stands out because of the speed of economic transition... it has successfully reduced the size of the fiscal deficit and it has the benefits of political stability in its favour despite being in a difficult neighbourhood," Khan added. Stuart Culverhouse, head of research at Exotix, a subsidiary of ICAP, said dollar debt of the kind issued by Ghana and Turkey was in short supply and an 8.5 percent yield was attractive. "I'm not surprised it was oversubscribed so heavily," he said. "A new issue from Africa will get into benchmark indices and people will be buying it for tracking purposes as well." Meanwhile, Ghana's cocoa board raised a $900 million trade finance facility, the largest structured soft commodity syndicated deal in Africa, the organisers of the loan said. Published September 27 By Sujata Rao Press Coverage: The Republic of Ghana (cont’d) 6

17. Ghana's 6.5 percent 2007 growth target achievable Ghana's finance minister Kwadwo Baah-Wiredu said on Thursday that his country's 6.5 percent economic growth target was achieveable despite recent floods in the West African country. "Earlier we had drought, now rains have come and we have floods but we are seeing it as an opportunity and a challenge. Agriculture may be affected but 6.5 percent growth will be achievable as we have done a lot on the industrial side and mining and construction are also doing well," he told Reuters. The minister was speaking after Ghana successfully issued a debut Eurobond for $750 million that was almost four times oversubscribed. "We are very happy. This is the first African country other than Egypt, Morocco and South Africa which has made it on to the international market and it shows the Ghana story is good," Baah-Wiredu said. "I hope other African countries will be able to succeed as well." Baah-Wiredu said a recent oil find in Ghana by Tullow Oil contained at least 1.3 billion barrels and likely more. He said it was in excess of the original estimate of 900 million barrels. "The prospectus indicated 1.3 billion barrels and we hope it could be more. It is at least 1.3 billion barrels," he said. Central bank governor Paul Acquah said he was sticking with his inflation target of 7 to 9 percent by end-December 2007. Analysts have been sceptical about this level citing the floods in northern Ghana, the country's bread basket. "The inflation target is in the 9 percent to 7 percent range. It's coming down rapidly. Currently our rate is 10.4 percent," the governor said. "Our target for end-December is (7-9 percent). We are an inflation-targeting central bank and we we are working seriously to achieve this.“ Published September 27, 2007 by Sujata Rao Press Coverage: The Republic of Ghana (cont’d) 7

18. Ghana Attracts Substantial Demand For Debut Bond Offering The Republic of Ghana attracted substantial interest from a wide investor base for its debut bond issue, said lead managers Thursday. Furthermore, Ghana is the first post-HIPC (Heavily Indebted Poor Countries) debt relief country to successfully tap the international capital markets. The sovereign issuer attracted over $3 billion orders received from 158 investors and sold a larger-than-expected $750 million 10-year Eurobond via joint bookrunners Citi and UBS. The issue was priced at par to yield 8.5% which equates to 387 basis points over Treasurys. Pricing was at the tight end of initial yield guidance in the 8.5%-8.75% area. "Ghana has emerged as a trend-setter in sub-Saharan Africa, having entrenched political stability and put in place macroeconomic policies that have secured extensive external debt relief under a series of international creditor-driven initiatives," said Paul Rawkins, a senior director in Fitch's Sovereign rating team in London. The Ghanaian Finance and Economic Planning Minister Kwadwo Baah-Wiredu told Dow Jones Newswires in May that the proceeds from the debut issue of bonds on international capital markets will be used to help upgrade the country's fraying infrastructure. Kwadwo Baah-Wiredu said although Ghana had received funds from organizations such as the African Development Bank over many years, that had been "piecemeal," and the country required more cash to improve its infrastructure. Standard & Poor's Corp. and Fitch Ratings assigned Ghana's debut notes a B+ rating. "Its very positive to see high demand for that type of credit," said Luis Costa, an emerging markets debt strategist at ING. Ghana was the third emerging market sovereign to tap international capital markets this week, behind Mexico and Turkey. Mexico became the first emerging market sovereign to return to overseas bond markets, since the summer credit crisis and global market sell-off. The sovereign raised $1 billion in a re-opening of its 2017 and 2034 overseas global bonds. Although the deal was four times oversubscribed, the country had to pay out much higher yields in comparison to the bonds' Friday closing levels. Meanwhile, Turkey raised $1.25 billion from the sale of bonds maturing in 2018. Unlike Mexico, "Turkey priced with virtually no premium - very close in yields to the 2020's" ING's Costa said. “The bond was three-times oversubscribed - they had no problem getting the deal away," Costa added. The bonds priced to yield 6.85%, which is just below the 6.888% yield on Turkey's last Eurobond issuance in February, when the country re-tapped its 2020 series to sell $750 million. As emerging market sovereigns have started to return to capital markets, it will only be a matter a time before quasi-sovereigns also come back, says Costa, referring to Russia's Gazprom and Rosneft. Published September 27, 2007 By Clare Connaghan, Press Coverage: The Republic of Ghana (cont’d) 8

19. Press Coverage: The Republic of Ghana (cont’d) Ghana thrills with $750m bond blowout Ghana was welcomed by international debt investors yesterday (Thursday) when it priced the first offshore bond issue by a sub-Saharan African government for almost 30 years. The $750m 10 year deal, led by Citigroup and UBS, attracted more than $3bn of orders from 158 accounts across the globe. The issue came as Ghana celebrates its 50th year of independence. It was the second issue from an Old World emerging market issuer since the recent market volatility, and followed a successful $2bn five year bond by India’s ICICI Bank and a $1.25bn 10 year issue by Turkey on Wednesday. The strength of demand for these transactions encouraged emerging market debt specialists to believe stability was returning to the market. "Having seen two successful deals [in EMEA] this week, we expect to see more sovereign issuance — from Gabon, for example," said one syndicate banker in London. "Then the quasi-sovereigns should come to the market, which should pave the way for financials and corporates." Suggestions that a $750m deal would be too big for B+/B+ rated Ghana and hurt the market proved unfounded. Priced at par, the bonds traded up to 101.50/102.00. "We are very pleased with the outcome of the deal, but not surprised it went so well, given that we started working on it in 2005," said Kwadwo Baah-Wiredu, minister of finance and economic planning in Accra. "It was well prepared and represents the international efforts made by Ghana over the years." Ghana has implemented stringent economic reforms in recent times, driving inflation down from 41% in 2001 to 10.4% in August 2007. Its GDP has grown strongly and Ghana has also benefited from debt relief agreements in 2001, 2002 and 2004 under the Enhanced Heavily Indebted Poor Countries (HIPC) programme. It received multilateral debt relief under last year’s G8 initiative. Ghana has implemented stringent economic reforms in recent times, “Our story has been very positive and this positive evolution is the result of a lot of discipline," said Baah-Wiredu. "As we seek to continue on the growth path, Momentum built quickly, driving the pricing to the tight end of guidance, although some market participants though that this was still on the generous side. "Right timing, right credit but questionable pricing as the deal has traded 30bp tighter,” one said. “It was too cheap by some margin. The leads obviously didn’t exert any pressure on investors to get a better level, but then leverage is with investors at the moment Some accounts that participated in the deal had already invested in Africa through local currency bonds and were therefore more familiar and bullish about the credit. Several Nigerian banks have also issued Eurobonds this year. Continental European investors bought 29% of Ghana’s bonds, UK accounts 28%, US buyers 42% and Asians 1%. Asset managers took 65% and hedge funds 17%, leaving 18% for banks, insurance companies and pension funds. "The proceeds of this deal supplement our domestic resources which finance these projects in Ghana," said Paul Acquah, governor of the Bank of Ghana. "We wanted to make sure that the borrowing was consistent with our objectives. Debt sustainability was at the core of going forward with this deal. It is important to bear in mind how Ghana has been through an energy crisis, how energy has been rationed and generating issues. The cost of fixing these issues is very high but we had to make sure that we used the proceeds in a prudent way.“ Published September 28, 2007 By Hélène Durand and I think the leads played to that. I was expecting a spread in the mid-200s and they came at 387bp, so this was generous indeed." The leads defended the pricing. "Given the deal’s significant size, we felt that a print at 8.5% would give investors the performance they were after," an official at UBS said. "We did not want to do a deal at 8.25% that would then go on to trade weakly in the market. While a smaller deal was available at a tighter print, this was not what the issuer wanted to achieve." Leads feel their way Pricing was also made difficult by the lack of comparables. From Europe, the Middle East and Africa’s emerging markets, only Turkey had priced a deal since the summer’s credit turmoil, and Turkey is an extremely regular and familiar issuer. Since Ghana is single-B, sovereigns such as Pakistan, Ecuador, Argentina and Jamaica were considered as benchmarks, but dismissed, because of the specificity of each of those credits and the wide ranges in which they trade. Investors’ feedback was the main point of reference. there are a number of reforms that we want to undertake, including a major overhaul of the country’s energy and road infrastructure. We had the approval from the parliament for an issue of up to $750m to fund these projects.“ The transaction followed an intensive roadshow where the issuer visited investors in the US and Europe. These visits helped to establish the main areas of concern although reconciling the investors’ feedback was no easy task. "There was a wide range of opinions on where value was on the deal," said an official at Citigroup. "While there was a consensus on the tenor accounts like, we had to bridge the gap between the variety of opinions as far as pricing was concerned. Some accounts thought there was value through 8%; others were at a much wider end. The guidance of 8.5% to 8.75% tried to encompass this feedback and bridge this gap between accounts." 9

20. Press Coverage: The Republic of Ghana (cont’d) Africa is openEuropean and US dedicated EM accounts lapped up Ghana’s debut Eurobond last week in a deal that bodes well for future sub-Saharan sovereign issuance. Disappointed investors helped propel the bond sharply higher in the secondary market as the Republic established a liquid benchmark for the next EM frontier. John Weavers reports. The Republic of Ghana (NR/B+/B+) secured an outstanding book of US$3.25bn for last Thursday’s debut US$750m 10-year Reg S 144a Eurobond, demonstrating the pent-up appetite for sovereign supply from the region. Citi and UBS were joint bookrunners for the land-mark issue, which was priced at par at the tight end of 8.5–8.75% guidance, equivalent to 387bp over Treasuries, before rallying on the break. Jonathan Brown, managing director and co-head of European syndicate at UBS, said guidance for the first sub-Saharan sovereign Eurobond outside South Africa in 30 years was done in something of a vacuum owing to the lack of an obvious comparable, as US investors looked to Argentina and Venezuela, while Europeans focused on Indonesia and Pakistan – “none of which really fitted the bill”, according to Brown. “Ghana could probably have done US$300m at tighter pricing but the issuer needed to do a bigger deal that attracted global demand. Their priority was achieved by getting a size-able deal done at a reasonable price that traded well in the secondary,” he added. Some would say the secondary performance was too good, as the bond traded as high as 102-1/4 for a 45bp tightening against Treasuries before settling back to 101-3/4–102-1/4 by late Friday, or 368bp over 10-year US debt. An origination manager away from the deal was impressed by its timing, but criticised final pricing. “The leads were not as aggressive as they could have been, as a two-point rally for a 10-year suggests another 1/8 or 1/4 point was clearly achievable,” he said. Brown argued that 8.25% or 8.375% in the primary state was not practical if the deal was to gain momentum. “The issue needs to be protected against potential volatility over the next week or so. Where the deal trades in a fortnight will represent a better gauge of how it has done,” he said. Ghana’s Finance Minister, Kwadwo BaahWiredu, was very pleased with the result and reiterated that the money raised would be used to tackle energy bottlenecks that have blighted the economy in recent years as well as to improve transport infrastructure. Maryam Khosrowshahi, managing director of DCM at Citi, pointed out that such spending has a higher economic return than typical World Bank and ADB loan-funded projects, which are smaller, take longer to arrange and tend to focus on social areas such as education and health. Stuart Culverhouse, chief economist at Exotix, noted that the US$750m issue was certainly on the higher side of initial expectations, saying: “This represents a sizeable amount that underlines the need for Ghana to continue with its economic improvements and debt management reforms in order to make that level of borrowing sustainable.” Khosrowshahi described the transaction as a “tremendous success that opens the door for other African issues”, while Culverhouse sees the deal as a significant development “that shows countries which follow the right policies do not have to be cut off from the international markets.” As far as future issuance is concerned. Baah-Wiredu stressed that Ghana would keep its options open while staying within prudent guidelines to maintain the country’s debt sustainability. He also suggested that the sovereign bond had “opened the gates through which Ghanaian corporates will follow.” The scale of the demand should certainly encourage other African issuers to come to the market. Elsewhere in the sovereign space, Gabon is expected to launch in November having mandated Citi and JPMorgan, while Zambia, Tanzania and Kenya are potential visitors, along with some Nigerian banks, most probably in 2008. Published September 29, 2007 10

21. The Republic of Ghana Secondary Activity on Ghana 8.5% October 2017 October 2007 Strictly Private and Confidential

22. Trading History: Bid/Offer Price Market Commentary Re-offer Price Week 0 24/09 – 29/09 Week 1 01/10 – 05/10 Week 2 08/10 – 12/10 Week 3 15/10 – till date • The transaction was followed by a strong secondary market performance as investors were keen to buy the Ghana paper. • The bid price has been stable considering this is the debut transaction for Ghana. • The bond price increased to102 in the course of 6 days and has stabilized around the 102 region. • The bid/offer spread was tightest at issue because of the high liquidity. The spread now is around 50 cents and would be expected to remain around this area. 1

23. Trading History: Yield Market Commentary Week 0 24/09 – 29/09 Week 1 01/10 – 05/10 Week 2 08/10 – 12/10 Week 3 15/10 – till date • The yield tightened last week from the 8.22 region during the first week of trading to around 8.17 corresponding to an appreciation in bid price during this period. 2

24. 24/09 – 29/09 01/10 – 05/10 08/10 – 12/10 15/10 – till date Trading Volume Market Commentary • Week 0: Balanced customer flows. • Week 1: Small flow, net customer sellers. • Week 2: Net street selling, small customer buying. 3

25. SOME LESSONS LEARNED AND CHALLENGES • Challenge of creating a meaningful role for local investment banking and legal experts - 3 Local co managers appointed but process is almost completely managed by international advisors because of highly technical nature of work. How do we capture some of the expertise locally when lead managers carry liability? • 100% pot allotment means • local managers are unable to participate in allotment process • difficulty of securing allotments for critical local investment constituencies • Reorienting economic management from program-driven discipline to market-driven discipline • Developing a strong investor relations culture to support secondary market and future issues e.g. information desk, regular information releases, etc