Gov’t borrowing on fixed-income market set to rise in second half of 2023
The domestic fixed-income market in Ghana braces for heightened state borrowing amidst mounting refinancing obligations and complex fiscal endeavors as the second half of the year commences. As experts predict a surge in government debt refinancing, the market is set to grapple with the implications of these financial dynamics on money market yields and overall economic stability.
Refinancing Challenges and Yields Projection
In Q3-23, government maturing bills are anticipated to reach an estimated GH¢31.01 billion, reflecting a considerable increase of 10.03 percent quarter on quarter (q/q). This uptick registers a remarkable 112 percent year on year (y/y) escalation from GH¢14.67 billion in Q3-22. The substantial refinancing amount, coupled with near-term inflation vulnerabilities, is expected to exert upward pressure on money market yields in early Q3-23.
Throughout the first half of 2023 (H1 2023), the Treasury’s issuance totaled GH¢44.19 billion, of which GH¢30.55 billion was directed towards refinancing maturing debts, while new short-term debts constituted GH¢13.64 billion. The escalating Treasury bill yields throughout Q2 have sparked concerns about the sustainability of the government’s debt profile.
Databank’s Insights and Yield Projections
Prominent asset management firm, Databank, has provided insights into the Ghana Fixed Income Market (GFIM), forecasting a rise in yields during H2-23. The driving factors include diminished liquidity and growing apprehensions about refinancing. The tightening of the monetary policy stance by 250 basis points and liquidity management measures by the Bank of Ghana (BoG) have constrained investor demand, contributing to elevated yields on open market operations (OMO) bills and prompting a shift towards Treasury bills.
Databank underscores the potential scenario where the government might accept bids at higher yields. In H1-23, investors demonstrated a preference for T-bills due to limited alternatives and the allure of higher yields. Despite receiving a US$600 million tranche under the IMF program, investors persisted in seeking higher yields, influenced by currency volatility, investor sentiment, and elevated yields on the central bank’s OMO bills.
Refinancing Risk and Yield Trends
Investors remain cautious regarding the risk associated with refinancing, as the government accumulates debt at the shorter end of the yield curve. The Q2-2023 period witnessed a resumption of upward yield trends.
Yields on Treasury bill auctions observed marginal increases as predicted. The 91-day bill escalated by 410 basis points to 22.97 percent, while the 182-day bill surged by 400 basis points to 25.44 percent from 21.44 percent. Similarly, the 364-day bill jumped by 359 basis points to 29.25 percent from 25.66 percent. As of end-July 2023, the 91-day bill surged to 15.4 percent, with the 182-day and 364-day bills standing at 27.15 percent and 30.13 percent, respectively.
Bond Market Resilience and Outlook
The bond market is poised to sustain its upward trajectory in turnover, propelled by government’s fiscal consolidation efforts and investor confidence. Coupon payments on new bonds and government’s commitment to meeting obligations on old bonds are anticipated to be pivotal drivers of market activity in Q3-23. Furthermore, market dynamics, external debt restructuring, and a favorable review from the International Monetary Fund (IMF) are expected to influence bond prices.
Ghana’s comprehensive Domestic Debt Exchange Programme’s (DDEP) second phase is underway, with voluntary investor participation in the restructuring of USD-denominated domestic bonds and cocoa bills. This anticipated restructuring is poised to align with market expectations.
The first half of 2023 witnessed a consolidation phase in Ghana’s fixed-income market, characterized by investor confidence post the approval of a US$3 billion IMF bailout and robust Q1-23 GDP performance surpassing market projections. Moody’s upgrade of the country’s long-term local currency issuer rating added to the market’s optimism.
Foreign investor appetite, however, remained subdued, despite a stable exchange rate outlook and ebbing inflationary pressures amid ongoing external debt restructuring negotiations. Notably, the bond market demonstrated robust trading activity for new bonds, indicating increasing acceptance among investors. Secondary bond market resilience in the face of evolving macroeconomic conditions was evident, with a 37 percent turnover surge from Q1-23. This growth, though significant, fell short of H1-22 levels by approximately 86 percent.
Yield Dynamics and Market Monitoring
The evolving yield landscape witnessed fluctuations during H1-23, shaped by varying investor risk perceptions. While shorter-dated bonds and bills continued to attract investor interest, the 2027-2030 maturities exhibited a higher average yield of 10.81 percent during H1-23. Conversely, the 2031-2033 and 2034-2039 maturities displayed lower average yields of 8.45 percent and 9.02 percent, respectively.
As the second half of 2023 unfolds, vigilant market participants will closely scrutinize government borrowing activities and fiscal developments, closely monitoring their impact on market yields and liquidity levels.
