Elevated T-bill yields counteract debt restructuring benefits

Despite recent progress on restructuring the country’s debt, short-term interest rates exceeding 30 percent are undermining the savings achieved according to Leslie Dwight Mensah, an economist at the Institute for Fiscal Studies (IFS).

With domestic markets as the sole financing source, he said, government remains vulnerable. “If stronger fiscal consolidation isn’t achieved, including on the restructured bonds, the possibility of higher payments during refinancing arises – accentuating the need for more robust fiscal consolidation,” Mr. Mensah said in the IFS review of the 2024 budget.

“The heightened rates counteract benefits derived from restructuring bonds initially paid at 19 percent interest down to 9 percent, part of bilateral negotiations after Ghana lost access to international capital markets. This situation emphasises the significance of every saved cedi, as it reduces the strain placed on the domestic debt market,” Mr. Mensah explained.

Domestic markets will finance 99.3 percent of the GH¢61.9billion deficit projected for 2024 as foreign sources remain closed off. Both this year and next, he said, government will largely finance its deficits through high-speed borrowing from the domestic economy, utilising the domestic debt market: potentially resulting in higher yields and throwing a spanner into government’s efforts at reducing debt to sustainable levels.

With limited bond issuances, short-term borrowing has spiked – raising worries about government’s high reliance despite efforts to consolidate fiscally. By November 2023, the Treasury had issued GH¢128.93billion on the money market, surpassing the GH¢119.77billion target. Investors meanwhile tendered GH¢133.07billion during this period. Notably, GH¢22.95billion of the total issuances represented net issuance (new debts), aimed at supporting the 2023 budget due to government’s inability to access international capital markets.

Analysts believe high borrowing needs in 2024 will persist, preventing yields from moderating. “The fiscal path in 2024 will result in a larger overall budget deficit compared to 2023, with substantial domestic funding,” GCB Capital stated.

The market watcher added: “It appears that the Treasury will sustain its robust funding appetite, possibly limiting yield correction”.

The current deceleration of inflation is expected to follow through to end of the year, given the 15-month low rate of 35.2 percent last October. Analysts forecast inflation could fall to 25 percent by year-end on favourable base effects. This backdrop supported market hopes for peaking yields along the T-bill curve after topping out from 29.97 percent to 33.70 percent in recent months.

The ongoing cycle of yield correction occurs against a backdrop of declining inflation rates, a stable monetary policy rate and implementation of new pricing directives by the Treasury. The gradual reduction in uncertainties sets the stage for a correction in nominal yields during the forthcoming weeks, barring unforeseen shocks to the macro-fiscal outlook.

However, fears also remain that the new 15 percent unified Cash Reserve Ratio (CRR) directive applied to local and foreign currency deposits may strain markets further. Last week’s undersubscribed auction revealed liquidity pressures following the requirement change. Analysts believe over GH¢11billion could exit interbank markets, escalating borrowing expenses.

Last two week’s auction results revealed such fears as there was a liquidity squeeze following the new CRR directive. The Treasury’s target of over GH¢5billion was undersubscribed by GH¢1.7billion, as the new directive drained excess liquidity on the interbank market while commercial banks raced to meet the regulatory requirement.

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