You are here: HomeNews2012 10 19Article 253622

Business News of Friday, 19 October 2012

Source: Daily Graphic

New Bonds To Restructure Debt

The Government plans to raise some GH¢500 million (US$264.6 million) from a three-year bond to restructure short-term debts and further strengthen the cedi.

It will be the third time this year; the government is floating bonds for cash, a move which has been largely bolstered by the July 2012 endorsement of Ghana’s fiscal programme by the International Monetary Fund (IMF).

The IMF subsequently disbursed US$178.4 million, which helped to bring credibility to the commitment to fiscal discipline in this election year 2012.

the government is, therefore, betting on the IMF’s endorsement to trade for more cash to restructure its short term debt and further strengthen the cedi.

Proceeds from the bonds are expected to be used to also mop-up excess liquidity in the system in support of the local cedi currency which has been battling with major international currencies as result of the high demand for the dollar by Ghanaian traders. The cedi has lost over a third of its value since Ghana began producing oil in November 2010.

The Bank of Ghana (BoG) held auctions for three-year and five-year government bonds between February and August.

The bonds were all oversubscribed which brought in fresh greenback supplies from foreign investors. Analysts predict further depreciation of between five and 10 per cent before end of 2012.

The Minister of Finance and Economic Planning, Dr Kwabena Duffuor, said it was purely to manage the government debt and restructure short-dated instruments such as the 91-day and 180-day treasury bills.

“As it is now, we’re facing a flat yield curve and we need to fix that effectively,” Dr Duffuor said, adding that he expected the upcoming bonds issue to be oversubscribed.

But the Executive Director of the Centre for Policy Analysis (CEPA), Dr Joe Abbey, believes that the new bond issue would provide additional foreign exchange into the BoG holdings to finance imports and defend the cedi.

According to him, “the government borrowing is not expected to crowd out the private sector in the domestic credit markets”.

He said unlike the short-dated bills – 91 day, 182, one-year and two-year notes – the medium term bonds were open to foreign participation and the records showed that the foreign investors typically took a much larger share.

For example, 90 per cent of the bids totally GH¢898 million accepted at 23 per cent in the last five-year bond issue was taken up by foreign investors.

He is confident that should the Finance Minister stick to his commitment not to use the proceeds to finance more spending, the foreign inflows could allow for greater access to credit by the domestic business community at a lower cost.

The rapid depreciation of the cedi in the first half of this election year was a reminder that the Political Business Cycles (PBC) phenomenon was at play.

The Bank of Ghana introduced stringent measures to avoid the worst of developments, such as the resurgence of inflation and costly losses of international reserve holdings of the Bank of Ghana (BOG).

As a result, the cedi stabilised in the month of August, and mild appreciations have been noticeable in September. CEPA expects that those policy measures would be maintained over the course of the fourth quarter of the year and beyond.

This underpins the projections that CEPA has made for the non-oil sector and which together with the contributions to growth from the oil subsector give the 8.5 per cent growth for 2012.

Ghana will hold presidential and parliamentary elections in December and there are investor uncertainties over the stability of the currency on fears of likely overspending by the government in order to win votes.

Given the poor fiscal performance in 2010, and the evidence of fiscal indiscipline in election years, the major concern of investors, heading into 2012, was the likelihood of excessive government expenditures and, consequently, a widening of the budget deficit.

There were also concerns of loose monetary policy arising from the inadequate sterilisation of excess liquidity in the system by the Bank of Ghana.

Indications of a liquidity overhang towards the beginning of 2012 were evident in the large amounts of currency in the hands of the non-bank public as well as in the large amounts of reserves of deposit money banks, which led to a build-up of their net foreign assets towards the end of 2011.

A sharp depreciation of the currency in early 2012 underscored macroeconomic vulnerabilities.

The cedi fell 30 per cent in the first quarter of 2012 due to excess liquidity in the banking system as well as buoyant growth, highlighting the importance of maintaining prudent fiscal and monetary policy.

The cedi appears to have stabilised, supported by the central bank’s policy intervention as well as foreign demand for domestic bonds.

Previous bouts of macroeconomic instability have forced unnecessary adjustment costs on the Ghanaian economy, particularly in post-election years.

In the past, Ghana's public finances have suffered election-related fiscal slippages, most notably in 2008. In 2012, another election year, the authorities expect the deficit to widen to 6.7 per cent of GDP, up from the original budgeted deficit of 4.8 per cent of GDP. This reflects a combination of repayment of arrears totalling 2.7 per cent of GDP, 18 per cent public-sector wage increases as well as increased energy subsidies.