"Government bonds are set to outperform"

" \n Ghana local currency bonds (GHGBs) have had a spectacular start to the year, compressing by 125bp, outperforming North and East African peers such as Egypt and Kenya whose bonds have ticked up by c. 20bp. \n \n\n \n \u201cOffshore appetite for local currency debt in addition to consistent BOG interventions via the spot and forward curve, led to the GHS strengthening by 3.7% against the USD by the end of February 2021\u201d, says Head of Markets at First National Bank Ghana, Kofi Pianim. \n \n\n \n Head of Markets at First National Bank Ghana, Kofi Pianim \n \n\n \n \u201cWe have seen the secondary market traded bond volumes increase by 150% year on year to $5.7 billion by the close of February. Strong market patronage by domestic and foreign investors led to primary issuance oversubscription and ultimately yield compression in the two to six-year tenor buckets,\u201d Mr Pianim adds. \n \n\n \n Given the global search for yield, fuelled by sizeable global monetary and fiscal stimulus, Ghana\u2019s outperformance is not entirely surprising. In addition, political risk fears have been tempered after the conclusion of local elections. \n \n\n \n \u201cAt RMB and FNB we and our clients have been asking the question: has the yield compression been overdone and do yields have further room to compress?\u201d says Neville Mandimika, RMB Africa Economist and Fixed Income Strategist. \n \n\n \n Neville Mandimika, RMB Africa Economist and Fixed Income Strategist \n \n\n \n \u201cOur model suggests that even though the 6-year bond is fairly valued, the upcoming Eurobond issuance offers tailwinds to the local curve. We estimate the local curve can rally by a further 150bp this year,\u201d he adds. \n \n\n \n The RMB model suggests that bonds could compress further in 1H21 to about 18.6% (70bp rally) largely driven by currency strength and more importantly, low inflation. However, several factors are likely to affect performance: \n \n\n \n Inflation : In RMB\u2019s base-case scenario, inflation is seen as trending lower in 2021 primarily due to base effects. This should result in price pressures bottoming out in 2Q21 and picking up slightly in 2H21 as the global economic recovery takes hold. Benign inflation at a time of nascent economic recovery should result in the central bank keeping policy rates unchanged in order to give the economy a chance to recover before hiking rates, which we think will only happen in 2022. \n \n\n \n Short-term rates : Linked to the RMB view of an accommodative monetary policy, it is estimated that short-term rates will tread water from here. This should allow for cheap funding for the long end of the curve, supporting some yield compression. \n \n\n \n FX (USD\/GHS) : It is estimated that the cedi could register another decent year, given the strong tailwinds in oil (in the wake of a successful vaccine rollout), gold (US inflationary pressure concerns) and cocoa (as tourism rebounds). Despite the nearly 2% strength in the currency this year, the cedi remains relatively undervalued. This is based on the cedi\u2019s REER level relative to its 5-year average to approximate this effect. \n \n\n \n With the cedi trading close to its fair value (i.e. near 0% deviation from its historical average), this should be a sweetener for investors as currency losses\/risks appear fairly limited. This contrasts to the Egyptian pound, which by this measure reaches 13%, suggesting greater exchange rate risk. The Nigerian naira is also set to experience weakening pressures, adding to the comparative appeal of cedi investments. \n \n\n \n \u201cThe big risk of course is that as offshore interest in GHGBs rises, it adds to FX pressure, particularly if this is hot money, as was the case in early 2019. The latest reading from the Ghana Securities Depository shows that foreign holdings in domestic debt instruments picked up in January 2021 to 21.2% from 19.8% a month before. We think this trend will continue in the months ahead,\u201d said Mr Mandimika. \n \n\n \n The expected (1Q21) Eurobond issuance (US$3bn \u2013 US$5bn) could have a material effect on the domestic curve. Ghana\u2019s finance minister noted that part of the funds will be used for liability management for both hard and local currency bonds. \n \n\n \n \u201cWe are of the view that the government will use the funds to retire some expensive local debt, as reflected by the recent GHGB 2-year bond auction where the authorities retired the 19.75% bond in exchange for a new 17.6% issuance, resulting in savings in excess of GHS179m,\u201d Mr Mandimika stated. \n \n\n \n To further illustrate the potential savings: if the entire GHGB curve was reissued at coupon rates 3ppts lower than current, the authorities would save GHS1.4bn. This is about 2% of revenue or 0.4% of GDP. \n \n\n \n \u201cGhana\u2019s government bonds are set to do well this year but also outperform their African counterparts,\u201d he further posited. \n \n\n \n Of course, as the curve gets pushed lower, investors will likely use this as an opportunity to take some profits, which would naturally add to rollover risks. Funds from the Eurobond issuance could then be deployed to manage this risk. \n \n\n \n \u201cThe combined effects of these factors suggest that the path of least resistance is lower bond yields, despite the current fair valuation. We estimate that the curve could get pushed down by another 100bp \u2013 150bp, post the issuance,\u201d remarked Mr Mandimika. \n "

"Government bonds are set to outperform"

Uganda crowned best investment destination in AfricaAMP

African countries can’t resolve their debt crisis under a system rigged against themAMP

Société Générale MD debunks rumors of exiting GhanaAMP

Société Générale MD debunks rumors of exiting GhanaAMP

Cocoa’s dizzying volatility is spilling into the coffee marketAMP

Absa opens China outpost to tap growing trade ties with AfricaAMP

Zenith Bank records 41% YoY growth in profit; assets value surge to GHS 15bn as NPL dip to 2.14%AMP

Headline inflation dips by 80bps to 25% in AprilAMP

Fitch Ratings forecasts Societe Generale’s African exit to fuel growth for Pan-African BanksAMP

Uganda crowned best investment destination in AfricaAMP

Off-grid solar sparks a lantern sales boom in Africa – reportAMP

African countries can’t resolve their debt crisis under a system rigged against themAMP

Société Générale MD debunks rumors of exiting GhanaAMP

Cocoa’s dizzying volatility is spilling into the coffee marketAMP