Debt market: Government focuses on increasing long-term debt securities to ensure greater bond market stability

After a smooth transition of power, the new government, in an effort to reduce income shocks that could affect future financing costs, restructured its debt profile by introducing 15-year domestic bonds to the market. A total of GHS207bn ($50bn) in securities were issued by the government of Ghana, the Ghana Cocoa Board, the Bank of Ghana and various corporate firms in the year to the end of September 2017. In the same period in 2016, the outstanding value of short-term debt securities decreased considerably, while those of the seven-, 10- and 15-year instruments increased, as the government sought to taper existing short-term debt securities.

With the introduction of the Ghana Fixed-Income Market (GFIM), secondary activities on the bond markets increased. As of the end of September 2017, the year-to-date (YTD) trading volume on the Central Securities Depository (CSD) was double that of the figure from the same period in 2016. Meanwhile, the e-bond platform showed a 25% increase from September 2016, with trading numbers increasing by 51% on the CSD platforms. According to the GFIM status report, dealers using the e-bond platform engaged in more voice confirmation trades and did not convert these to voice trade reporting, resulting in lower YTD trades as of the end of September 2017, compared to the same period in 2016. The money market was liquid during this period as investors turned to secondary markets in search of higher fixed-income yields. Market turnover of fixed-income securities at the end of the third quarter of 2017 was GHS10bn ($2.4bn).

The end of September 2017 saw a downward pressure on both the 91-day and the 182-day bill yields, registering closing figures of 13.14% and 14.03%, respectively. The decline in rates was primarily attributed to the government’s move to cut off the short end of the yield curve by rejecting higher-yield bids by dealers at auction. The one-year note closed the first half of 2017 at 15%: the two-year note at 17%; the 3-year note at 18.5%; five-year bonds at 18.25%; seven-year bonds at 19.75%; 10-year bonds at 19%; and 15-year bonds at 19.75%.

Performance

Sub-Saharan African debt markets generally performed well throughout 2017. Most countries, however, have international bond maturities due during the course of 2018. These countries are expected to issue more securities to pay off these maturities due to their fragile economies, which are characterised by the slump in oil and commodity prices, and political instability.

The Standard & Poor’s (S&P) Ghana Sovereign Bond Index, which monitors the performance of local currency-denominated sovereign debt issued on the domestic market, recorded a YTD return of 13.31% as of the end of September 2017. Ghana’s index outperformed the S&P Africa Sovereign Bond Index at 8.56%, which tracks the performance of local currency sovereign bonds across 13 African countries: Botswana, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa, Tanzania, Tunisia, Uganda and Zambia. Meanwhile, the S&P Sovereign Bond Indexes for Nigeria and Kenya stood at 13.28% and 7.84%, respectively.

Projections

Ghana’s economic data remained positive in the first three quarters of 2017, with real GDP growth of 5.9% outperforming that of the global economy. The country’s YTD debt-to-GDP ratio declined to 68.2%, compared to 73.1% in the same period of 2016 and 73.2% in 2015. The IMF forecasts a further decline to 66.1% in 2018. This can be attributed to the government’s debt reprofiling programme. Debt management objectives, such as lengthening the maturity profile of debt instruments, are therefore expected to continue in order to lengthen the maturity profile of debt instruments. The reduction in short-term securities should see the evolution of long-term debt instruments offering more attractive rates at primary auctions.