Erratic inflation stoking short-term-debt demand – Report

More investors are increasingly looking to short-term securities as they seek to ramp up value on their investments following years of sporadic inflation, InvestCorp — an investment advisory firm — has revealed.

Despite the Statistical Service last week revealing August’s inflation had dropped to 17.3 percent from the previous month’s figure of 17.9 percent, the investment advisory firm said inflation over the past five years has been largely erratic.

According to InvestCorp’s last month’s economic report, “Essentially, by accepting a relatively long period of erratic inflation in recent times, the market is revealing a new enhanced bias toward short-term securities — including foreign portfolio investors.

“Our concern is that this renewed short-term bias is not healthy for financial stability and private sector growth. For example, investor preference for short-term securities will continue to starve the private sector of access to medium- to long-term funds,” the report said.

Data from the central bank shows that out of the total outstanding securities of GH¢28.2billion issued as at end of the second quarter foreign investors holds about GH¢6.7billion, which forms about 23.82 percent of the total holding.

The report was authored by InvestCorp’s Managing Director Sampson Akligoh, and said: “In this regard, we believe that despite the inflation fears it is important investors and issuers focus attention on inflation-adjustable debt instruments, floating interest rate securities, and standardisation to enhance liquidity.

“Overall, this will reduce the apparent asymmetry in investor/issuer duration — and thus help avoid market brittleness which has the potential to cause illiquidity and instability in the financial system.”

Commenting on the country’s consumer price index, the investment advisory firm said, traditionally, inflation is seen as accompanying strong growth and credit expansion for Ghana.

“But in recent times inflation has remained relatively high in the midst of slower growth, weak commodity prices and slack demand. Noticeably, recent inflation cycles have been erratic, with a 5-year low and high of 8.4 percent and 20.7 percent respectively; which has helped to shape market inflationary expectations to the upside, and introduce a degree of uncertainty in medium-to-long-term macroeconomic expectations.”

While the central bank stated in its July Monetary Policy Committee meeting that its medium-term inflation target of 8±2 percent has shifted from the third quarter of 2017 to the fourth quarter of 2016, the InvestCorp report forecasts a much higher consumer price index.

“Our expectation is that inflation will remain within the region of 12-14 percent over the medium term. Observably, while economic growth has slowed and consumer demand is relatively weak, the pass-through effects of the cedi’s depreciation have kept inflation relatively high,” the report said.

Inflation in Ghana has averaged 12.2 percent in the past five years. The path for inflation during the period was influenced by strong consumer demand in line with robust economic growth, adjustments in utility and domestic petroleum prices, as well as seasonal food price dynamics.