Foreign investors cut holdings in local securities

Foreign investors reduced their holdings in Ghanaian securities by GH¢362million within the first three months of this year -- making it the second consecutive time in six months that non-resident investors have cut their investments, figures from the Central Securities Depository have shown.

The divestment of securities is about 5% of the total value of securities foreign investors held in Ghana in the last quarter of last year, and coincides with plans by the US Federal Reserve to raise its interest rates, which is expected to hold back huge inflows to emerging economies.

According to data from the Central Securities Depository -- which records the holdings of all securities in electronic form, non-resident investors investment in the Ghanaian money market was about GH¢6.82billion in the first quarter of this year, which is less than the GH¢7.1billion made in the last three months of 2014.

In the third quarter of last year, the value of securities held by foreign investors was about GH¢7.68billion.

B&FT analysis of the data shows that the foreign investors cut most of their holdings in the 182-Day Government of Ghana Treasury bill, and the 2-year and 3-year Government of Ghana fixed notes.

At the end of the third quarter of last year, the percentage share of securities held by foreigners was 28 percent, which dropped to 24.58 percent in January and 23.69 percent in March this year.

The continuous decline in the share of securities held by foreign investors’ means that government now depends largely on local investors to meet its domestic investment needs and to fund the budget deficit.

Some economists and investment bankers contend foreign investors’ divestment of Ghanaian securities is encouraging, as it limits the exposure of the economy to certain risks at a time capital flight has been blamed for the decline of the local currency, which has depreciated by about 16 percent since beginning of the year.

Others, however, believe the decline in foreign holdings suggests weakening investor appetite and loss of confidence for government’s debt, because of lingering doubts about long-term macroeconomic stability and public financial sustainability.

Derrick Mensah, Senior Analyst at African Alliance Securities Limited explained: “It has always been the foreigners who participated in the 2- and 3-year bonds, and based on the data over there this means that the foreign investors are not rolling over their matured bonds. This goes to confirm the view all of us hold that investor sentiment is very low and declining.

“This is largely expected because investor confidence has waned, and waned considerably. The exchange rate hasn’t been good at all. There is a lot of currency risk. For instance, if I (an investor) buy now, chances are that I am going to see a depreciation of about 10 percent before it matures for me to take up my returns.

“Therefore, a lot of currency risk is in there; because later if you want to take your money with about 25 percent return, it doesn’t reflect that true value. Obviously, you will look for a place that provides lower yields but has a more stable exchange rate.

“The second thing is to do with the macroeconomy. Looking at the way the central bank is printing money, the deficit situation, and what we are currently going through, Ghana is not a very sweet spot at the moment.

“The rates are relatively higher, but coupled with the exchange rate we are experiencing it goes to erode the returns you are making. The macroeconomic situation is not great and investors shy away from such situations… we really need to get the macroeconomics right; if not, we are going to be in this position for quite some time.”

Another investment banker, Collins Appiah, who is the Managing Partner of Home Rent added: “The economy is still experiencing huge risks, and investors who are risk-averse will take decisions that will not go in our favour. That is why we are seeing foreigners move away.

“Ideally, interest rates should have compensated; but rational investors know that the more interest rates go up, the more likelihood of default. Formerly, governments were thought of as never defaulting -- but looking at what has happened to Greece and other Euro-zone countries, government default is very likely.”

Government has served notice that it will borrow GH¢25.42billion from the domestic money market within the first six months of the year, which is twice the GH¢12.72billion it borrowed through the issuance of government securities in the same period last year.

The data from the Central Securities Depository show that for the first three months of this year, the Government of Ghana issued 54 securities valued at GH¢13.4billion. However, the total face value of securities issued by the Government of Ghana, Bank of Ghana and Cocoa Board at the end of the first quarter was about GH¢16billion compared with GH¢10.3billion securities issued for the same period last year.

At the same time, in the first three months of this year, the Central Securities Depository processed and paid about GH¢16.19 billion to investors as interest and maturity proceeds; and this is six percent more than it paid to investors during the last three months of last year.

This year, government has budgeted GH¢8billion as interest payment for domestic debts -- out of the total GH¢ 9.5billion -- raising concerns a debt overhang may cause government to be unwilling to implement adjustment programmes that will promote economic growth because a greater proportion of the benefits will end up as debt-service payments to creditors.

Development experts have thus urged government to use borrowed funds judiciously -- in particular for productive purposes, so that sufficient growth can be generated to reduce the debt service burden and foster sustainability.