“The private sector players must understand the structure and nature of the strategy and not fear that they will be crowded out if the government continues the way it is going now,” he stated.
Mr Arthur said this in an interview with the Graphic Business last Monday in reaction to concerns raised by some private sector players, including the Association of Ghana Industries (AGI), that the government’s approach was bound to crowd them out as far as raising money from the domestic market was concerned.
This month, the government successfully raised a GH¢2.25 billion after issuing a domestic bond over a 15-year period with a coupon rate of above 19 per cent, sparking concerns about the approach and its impact on the private sector should the trend continue. The amount was raised to clear maturing debts.
Debt management strategy
Elaborating on the strategy, he said: “My thought on the government’s debt management strategy, particularly resorting to domestic borrowing, is that it is the right way to go.”
“The fears of crowding out is unfounded based on two reasons. First, it is the long-term nature of the issues that matters here; these are five, seven, 10 and 15-year issues. These are obviously not the ones the financial institutions or the banks will be interested in. Crowding out will occur when the government competes directly with banks for loanable funds, funds that: could have been lent out to businesses,” he added.
Mr Arthur maintained that; “Because these are long-term instruments – 15-year bonds – ordinarily banks will not be locking their funds in those instruments.”
Secondly, he said, “so long as the government succeeds in re-profiling the debt stock where there is no long-term bond in the stock, it will fall on the price of short-dated T-bills, 91 days, which we have already seen coming down. That approach will also be unprofitable for the banks to lock their funds so they have to look for high-quality risk assets to fund. So for these two reasons, the fear of crowding out is not founded in these arrangements.
He said there were some inherent risks, but noted that: “The key is how the government sustains this strategy, and that will be sustainable if it sticks to its fiscal programme. There should no deviation.”
Mr Arthur observed that the government’s deficit target of 6.5 per cent at the end of the year was laudable but too optimistic.
The government has predicted a deficit target of 6.5 per cent, which comes to GH¢13 billion.
“My worry is that the government is optimistic about the deficit target and that arises from what the government is saying are strategies it has put in place to make up for the loss in revenue that is arising from the abolishing of some of the taxes,” he said.
Mr Arthur said the tax cuts would cost the government about GH¢1 billion and “so unless the government is able to find measures to recover the one billion, I expect the deficit to rise to GH¢14 billion, and so the target might be missed by about one percentage points”.
Mr Arthur advised the government to consider other strategies in its debt management programme.
“I think the government should look at a combination of domestic issuance and external financing. I mean they should look at the cheaper alternatives to the regular Eurobonds; we need some dollar-denominated funds to support certain infrastructure projects.”
According to him, there were options out there which the government could combine with this domestic bond issuance and ultimately arrive at a mix of external and domestic debt that does not impose too much burden on the government.
Regarding the bonds issue, Mr Arthur said, “The government could consider areas such as the PANDA bonds from China and private placement deals where it could do specific one-on-one deals using the book running approach on the external market.”
“So there are actually funds out there where they can consider having mutually beneficial rates which take into account the future prospects of the economy. Obviously the market pressures that come to bear when pricing in an emerging market sovereign bond will not occur in a private placement environment,” he said optimistically.
He added, “By and large, the debt management strategy the government has adopted should be continued; I expect banks’ base rates to start dropping because of the drop in the T-bills and I say this because it factors into their calculation.”
To him, these are positive developments “and we need to encourage the government to stick to its strategy”.
Mr Arthur asserted, “Our bane in the past has been the lack of discipline in carrying out some of these policy directions. On paper, the programme is very good but we need to have clear strategies to withstand any headwinds, most of which may be unexpected. Some of the risks could be reduction in oil and other commodity prices which are a core to the government’s revenue.”
On the impact of the government’s domestic debt management strategy on pension funds, the CEO said the move was positive because of the long-term nature of the bond issued by the government.
According to him, pension funds strive when they are invested in long-term instruments and, therefore, urged players in that space to position themselves right to take advantage whenever there was an opportunity.
He said there was a bond issuance calendar which fund managers needed to seriously monitor to take advantage of when the opportunity arises.
“We should encourage the government to stick to the strategy and not play politics. We must do economics and not politics. The finance minister must not be pressured to fund party promises but be allowed to do what is in the best interest of the nation. The real sector programme is good, the financial programmes are good so it’s just a political will to implement some of them,” Mr Arthur said.