Rising fears over short-term debts

Business News of Tuesday, 3 March 2015

Source: Graphic Online

BOG Building

Economic analysts have warned that the financing of the country’s fiscal deficit through the frequent issuance of short-term bills by the Bank of Ghana poses significant economic threat.

Bank of Ghana plans to raise about GH¢25.4 billion in debt, which is over 100 per cent more than what it raised in the first six months of last year.

Of this amount, about 1.92 billion will be raised through 91- and 182-day bills, while GH¢1.6 billion will be raised through one and two-year notes.

The fund is to partly finance maturing debts and fund its ballooning deficit. Government had already auctioned a three-year GH¢630 million at a coupon rate of 26 per cent refinance government’s debts. The auction was oversubscribed to a little over GH¢908 million, to which the government only accepted GH¢470 million, according to the Acting Head of Treasury, Mr Collins Antwie.

Head of Standard Chartered Bank’s Africa research, Ms Razia Khan, and analysts at Investment firm, Databank, Mr Courage Kingsley Martey, said the trend could spark inflationary trends and hike interest rates.

“Fundamentally, Ghana will have to look for ways to reduce its fiscal deficit quickly to guard against the shock of inflation,” Ms Khan said in an email to the GRAPHIC BUSINESS.

The government began a final round of talks with the IMF last week for a financial package aimed at resolving fiscal problems that have helped slow growth.

But Ms Khan said: “If Ghana is running a large fiscal deficit, and financing that deficit by issuing a great deal of short-term securities, that may still be inflationary – regardless of where interest rates are.”

Terkper disagrees

But Finance Minister, Mr Seth Terkper, disagrees, saying that the short-term instrument was only used to fill a liquidity gap.

“The ultimate goal of the short-term instrument was to fill a liquidity purpose and fill a funding gap when there was a delay in the non-tax revenue,” he said in an interview.

He said the government had already restored the issuance of the three and five-year bonds since 2010 to reduce the reliance on the short-dated instruments.

The government is set to revise its 2015 budget projections in light of the oil price slump, leading to a higher deficit projection than the initial figure of 6.5 per cent.

Earlier this year, the Bank of Ghana revealed government’s intention to borrow GH¢25.42billion from the domestic market within the first six months of the year; an amount that is twice the GH¢12.72billion it borrowed through the issuance of government securities in the same period last year.

According to the government’s debt issuance plan for the first half of this year, in February alone it is expected to raise about GH?4.15billion through various securities including Treasury bills, 1-year and 2-year fixed notes.

Analysts believe issuance of the first 3-year fixed rate bond offers investors a chance to reaffirm their confidence in the economy at a time when a plunge in world crude oil prices is posing significant risks to government’s fiscal consolidation efforts.

However, Mr Courage Martey of Databank is even more worried that the aggressive borrowing on the domestic market tends to compete with the private sector for the limited supply of funds.

“Given that Ghana is a nation with very slow savings rate, competition for funds has always resulted in a surge in interest rates, crowding out the private sector in the investment space,” he said.

Mr Martey feared that the rising interest rate, which is currently hovering around 30 per cent, would threaten the survival of the SMEs, which is the dominant economic sector in Ghana.

The numbers show government has a high appetite for more debt considering the plan to borrow more in the short-term instruments, which are the 91 and 182 day t-bills.

Interest rates are likely to go higher, which makes it a preferable option for banks to invest rather than give those monies to individuals or businesses as loans.

IMF deal to fetch US$940m

Ghana is expected to receive about US$940 million from the International Monetary Fund (IMF), to help it turn the ailing economy around.

According to a statement from the IMF, Ghana could be supported with a total of “SDR 664 million (around US$940 million), or 180 per cent of Ghana’s IMF quota” and “consideration by the Executive Board is tentatively scheduled in early April 2015.”

The IMF team, led by Joel Toujas-Bernate, clarified that the $940 million was for balance of payment supports and not direct budgetary injections.

Mr Toujas-Bernate is quoted in the statement as saying: “The IMF mission and the Ghanaian authorities reached staff level agreement on an economic program aimed at overcoming the country’s economic challenges, supporting stronger economic growth and lower inflation.”

Rising consumer prices and the worst power outages in a decade are slowing economic growth, adding to currency risks.

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