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Economic woes Govt cancels 5-year domestic bond issue

 The Ministry of Finance last week cancelled efforts to issue a GH¢500 million (US$127 million) five-year bond in the domestic market this month due to what the ministry described as “recent market developments".

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Finance Minister, Seth Terkper play

Finance Minister, Seth Terkper

The government’s attempt to reduce its deep involvement in the domestic bond market to the advantage of private sector players suffered a setback due to grim investor interest.

 The Ministry of Finance last week cancelled efforts to issue a GH¢500 million (US$127 million) five-year bond in the domestic market this month due to what the ministry described as “recent market developments".

Though the government did not give details of reasons behind the postponement, analysts say uncertainties over the country's economic outlook has rendered its long-term domestic debt unattractive to investors.

Proceeds from the bond were to be used to restructure the growing government debt, which is mostly from short-term domestic money market instruments.

The government, as part of its debt management strategy, is piloting a new method of issuing debt instruments dubbed: “the book-building approach,” which looks at medium to long–term instruments only.

The Finance Ministry had selected Barclays Bank, Stanbic Bank and Strategic African Securities (SAS) as joint Book Runners. 

Market uncertainties

A senior economic analyst at Databank, Mr Courage Kingsley Martey, said in an interview with the Graphic Business that the government faced an uphill task in its debt management strategy to restructure its debt portfolio by converting short-term obligations into longer-dated instruments.

“Government would have to reduce its appetite for short-term borrowing in order to discourage investor preference for short-term fixed income securities,” Mr Martey said. 

Rising yields

Yields on government debt have been on the rise for the last three years. The rate for the Bank of Ghana's benchmark 91-day bill rose to 25.33 per cent on September 4 from 25.21 per cent a week earlier.

This shows that despite the ongoing fiscal consolidation, investor sentiments remain quite fragile and would require structural improvements in the economy before they can be fully convinced to re-engage with the country.

"It was going to be difficult for the book-builders to convince risk-averse investors to participate in a five-year cedi bond at this time when they are not certain of the immediate future path of the economy," an Accra-based fund manager said.

 This is the third in a little over a year that the government has cancelled planned issuance of some domestic bonds. Earlier this year, the government cancelled a seven-year domestic bond planned for April this year. Last year it called off advertised five-year auctions to avoid exorbitant yields on the debt.

The government is currently under a three-year aid programme with the International Monetary Fund to stabilise the economy, dogged by stubborn deficits, high public debt and quickening inflation.

Ghana’s total debt is hovering around GH¢92 billion and economists have expressed worry about the level of borrowing, suggesting the debt levels are unsustainable.

But the government has insisted it is doing what it calls smart borrowing and has maintained that it is spending any loans acquired on projects that can refinance the loans.

In August when the bond was launched, Finance Minister Mr Seth Terkper pleaded with financial institutions to balance their portfolios by investing in the new medium to long-term bonds of government.

“Government securities are still safe - indeed, one of the safest in the country - and so we will urge the banks and financial institutions to look critically into it and balance their investments and not put everything in the short end of investments or look at only high profits in the short only,” he urged.

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