Cedi volatility disturbs debt sustainability agenda

The cedi’s recent fluctuation poses a big risk to government’s debt sustainability agenda due to high exposure of the nation’s public debt to foreign investors, an analysis of the debt portfolio has shown.

At the end of 2017 external debt constituted 53 percent of the total debt portfolio, which was down from 56 percent in 2016, while US$-denominated debt formed 65 percent of the external debt stock – which also dropped marginally from 69 percent in 2016.

“Ghana’s public debt is highly dominated by foreign holders with significant exposure to a single currency, the US$. Notwithstanding the marginal reduction in concentration ratios, the public debt portfolio remains vulnerable to exchange rate shocks, particularly the US$/GH¢ exchange rate,” states an Economic and Policy Brief Analysis of Ghana’s Public Debt Management in 2017 by Databank Research.

“We note that the sharp depreciation of the Ghana cedi against major international trading currencies – particularly the benchmark US$ – in recent years is also, partly, responsible for the steep nominal growth in the debt portfolio.”

Despite government reducing the component of foreign debt due to the high exposure to foreign investors, any depreciation in the local currency automatically increases the debt stock even if there is no new borrowing.

“Apart from the strictly external debt, even our domestic bonds (although cedi-denominated) are dominated by foreign investors. So, when they [foreign investors] have to sell-off to exit our market they demand dollars in exchange for the cedi in order to exit – and this adds to the depreciation pressures,” explained Courage Martey, an analyst at Databank Research.

Last week, the bond market experienced a significant sell-off, with prices for most of Ghana’s bonds tumbling greatly; and this, according to Mr. Martey, is mainly the result of foreign investors dumping frontier and emerging market bonds in anticipation of higher dollar Treasury yields.

“All these external developments are always going to change investor sentiments about frontier and emerging market bonds,” he noted.

As at May 7, according to the Bank of Ghana, the cedi was trading at GH¢4.4086 to a dollar; but by June 7 it had depreciated by 0.7 percent to GH¢4.4378. On the forex bureau market, the local currency has depreciated by 1.1 percent over the same period.

Even though the central bank has assured the market that the depreciation is temporary and it is working around the clock to stem the slide, analysts believe that unless government significantly reduces the foreign debt component of public debt, its efforts will amount to little.

The cedi was on a positive ride with 0.26 percent appreciation in the first quarter of this year. But the expected increment in interest rates by the US Federal Reserve this week, and the European central bank’s announcement of debating the timeline to commence tapering-off its Quantitative Easing Programme has seen foreign investors ditch Ghanaian bonds.

Also, the central bank has noted that rising oil prices and the recent launch of MTN’s Initial Public Offering (IPO) have had some effect on the local currency, due to the fact that the GH¢3.48billion to be raised will be used to settle shareholders who mostly reside outside the country.

Speaking to the B&FT, Steve Opata-Director, Financial Markets Department at the central bank, said its assessment of the cedi’s troubles reflect a spill-over from external market developments.

“These developments, which initially impacted emerging markets, are beginning to spill-over into frontier market economies like Ghana in the sub-Saharan Africa region,” Mr. Opata said.

Hope on the horizon

The Databank Research report notes that Ghana’s prospects for achieving debt sustainability over the next three years have been enhanced by recent improvements in the fiscal environment, coupled with the prudent debt management strategies.

It adds that sustained primary surplus will lower the public sector borrowing requirement and slow down the debt portfolio’s growth rate. “Ghana’s 2 percent primary surplus target, if achieved, would firmly put the country on the path of debt sustainability – especially if sustained over the next three years.”

The report however warns that the positive fiscal outlook hinges critically on increased mobilisation of domestic revenue, as the expenditure cuts implemented in 2017 will prove unsustainable in the medium-term.

Even though the IMF is expecting government to mobilise additional revenues equivalent to 0.5 percent of GDP at the mid-year review of the 2018 budget, the report expects the mid-year review to introduce new tax measures to improve revenue performance.

“The potential recovery in growth of the non-oil sector, which currently accounts for 95 percent of Ghana’s economy, should also provide a firm basis to accelerate domestic revenue through a broader tax base in the medium-term.

“Ongoing measures – which include the enforcement of Taxpayer Identification Number (TIN), the tax stamp policy, the deployment of Fiscal Electronic Devices (to monitor VAT transactions in real-time) among others – will contribute to broadening the tax base,” the report indicates.