As part of measures to raise revenue and ease pressure on the central government, Chairman of the Research Committee at Tesah Capital, Professor Elikplimi Agbloyor, is recommending that managers of the economy consider lengthening the nation’s existing debt profile through the issuance of a 30-year domestic bond
Currently, the longest-tenured domestic debt instruments are a 6-year bond, a 7-year bond, a 10-year bond and a 15-year bond, with the longest tenor being a 20-year bond introduced in 2019.
The 20-year bond – which was issued through a shelf offering ostensibly to extend the tenor, yield curve, and establish a benchmark by deepening the domestic market and leading a better price discovery as well as a deepening the secondary market – missed its target amount of GH¢450million.
In an interview with the B&FT, Prof. Agbloyor – who doubles as an Associate Professor in Finance at the University of Ghana Business School (UGBS) – stated that the issuance of a long-term cedi-denominated bond would, among other things, minimise the likelihood of a default; which would in turn offer investors some degree of confidence.
“In this conversation about what can be done on the monetary and fiscal sides, one thing – which I have not seen much discussion around – is lengthening the debt profile, in particular maturity of the debt. If we were to introduce, say, a 30-year domestic bond, it would reduce the pressure on government as we would not have to pay immediately. Additionally, it could reduce our credit spread as well as the estimated probability of default,” he stated.
He however noted that the current market conditions coupled with lingering concerns over longer-dated bonds would make a local currency-denominated instrument a tough sell.
Data from the Bank of Ghana (BoG) indicate that on a year-to-date basis the cedi has depreciated by 15.8 percent, 8.2 percent and 8.9 percent against the US greenback, British pound and euro, respectively.
Furthermore, headline inflation has jumped by 11 percentage points, year-to-end-April, accelerating to 23.6 percent with little sign of abating.
“It is easier to issue these longer-term bonds if the economy is strong. Looking at where inflation is currently, for instance, it is only to be expected that investors would demonstrate some resistance,” Prof. Agbloyor said. “But I still believe the longer-term security should be explored.”
Real interest rates, however, continue to remain negative, as the central bank’s benchmark policy rate (19 percent) and that of the Treasury’s bills (91-day, 18.2 percent) are outpaced by inflation, resulting in investor hesitance.
This was evident when, in April, of the Treasury’s total target size of GH¢5.21billion across 91- to 364-day bills, it was only able to raise GH¢2.97billion from investors; missing the mark by GH¢2.24billion and representing a 35 percent dip compared to what was recorded for the previous month.