The government of Ghana had for some time this year nurtured the idea of issuing domestic bonds in the foreign currency (USD), ostensibly as a control tool to mitigate the negative effects of the cost of issuing bonds in the international capital markets. The strategy finally materialized with the government issuing the first ever USD denominated bond earlier in the month of October 2016 for a tenure of two years due on October 17 2018. The issue size was USD$94,642,000 at a yield of 6%. The price guidance was at 5.50% to 6.50%, with a corresponding tendered bid of USD$99,642,000. From the government’s perspective this issue and more crucially the corresponding strategy of issuing foreign denominated bonds in the domestic market is a prudent debt management strategy and is committed to further issues in the near future. However a closer look at the strategy reveals serious ‘cracks’ in the strategy which could prove precarious for; stability of the Ghana Cedi, and foreign exchange liquidity pressures on the financial industry
The claim of prudent strategy by the fiscal and monetary policy authorities could possibly be on the back of the possible gains in difference of spread from the international capital market and that of the foregoing instrument. All previous bonds issued in the international capital markets have attracted yields in excess of 6%pa. This could be very deceptive as the tenures of these issues have been over longer terms with the 2015 Eurobond issue attracting a yield of 10.75% over a 15 year period. The controversial 2016 issue attracted 9.25% for a 5 year tenure. Making adjustments for tenures could reveal counterfactual results as longer. Taking the claims as a given without smoothening the tenures, the following are likely to be the result of the strategy:
(i) Stability of the currency (GHS)
The Ghana Cedi has for the better part of the year remained relatively stable, arguably on the back of strategies deployed by the BoG and a slowdown in speculative activity. These strategies include the directives for the surrender and repatriation of export receipts to promote greater and determination of the exchange rate via stability in liquidity flows in the market (BoG Notice No. BG/GOV/SEC/2016/02). This directive since its implementation is requiring exporters to sell the surrender portion of their export receipts directly to the commercial banks. This has since improved the liquidity of foreign flows for commercial banks, easing the pressures. The same notice further requires all exporters to fully repatriate their proceeds to BoG for credit of their foreign exchange accounts or converted into the local currency on a need basis.
The commencement of the issue of USD$ denominated securities by the government could derail the gains the above directives could have garnered and further set in motion a new trend of depreciation of the Cedi. The seeming attractive rates of these issues could likely drive conversion of domestic currency deposits into USD for the procurement of government securities. Thus the rate at which the government issues these securities could be the determining factor. But for a government that is primarily cash trapped, it is not incongruous to assume a gradual and consistent issue of these securities. The ensuing demand pressures could plunge the value of the currency, particularly when the government is primarily using these proceeds to pay of interests on Eurobonds and other international financial obligations. At a time when export proceeds are dwindling, it is very dangerous for this strategy to be resorted to, particularly in the absence of a framework which industry players buy into.
(ii) Liquidity pressures
For an import driven economy, it is quite difficult for anyone to appreciate the stance of government in this strategy, essentially competing with private importers for foreign currency, with the damning implications this could have over the long term on the prices of goods imported. It is very curious, what the intended objective of the prescription really is, particularly when the financial industry does not have excess supply of foreign currencies (at least judging from historical records). It will appear that the relative stability in the value of the currency from the beginning of the year could have informed this turn of events. But this has to be balanced against the pressures from imports and the consistent decline in the proceeds from exports. The situation could further be exacerbated if ‘proxy buying’ of the securities are pursued by international investors through local contacts, particularly as the government and BoG has no clue as to who is buying cedis and stashing them in USD$ account in order to buy dollar bonds. This could be disastrous over the long term. The upside could have been if the regulator and government could allow USD$ earners to keep the funds in their accounts for further injection into the market.
Author: Patrick K. Stephenson
CEO – AFRINVESTLLC
Economic Analyst|Policy Analyst|Banking Professional|Frontier Market Analyst|Chartered Development Finance Analyst
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