Debt market braces for higher government borrowing, refinancing obligations

As the second half of 2023 unfolds, the domestic fixed-income market faces the prospect of increasing state borrowing on the money market even as government gears up to address higher refinancing obligations and fulfil various fiscal activities.

Experts anticipate government to refinance maturing bills estimated at GH¢31.01billion in Q3-23, a significant increase from the previous quarter, thus 10.03 percent quarter on quarter (q/q) – up by approximately 112 percent y/y against GH¢14.67bn in Q3-22. The high refinancing amount and near-term inflation risks are expected to keep money market yields relatively high in early Q3-23.

The Treasury in first-half 2023 (H1 2023) made total issuance of GH¢44.19billion, of which GH¢30.55billion was utilised to refinance maturing debts while new short-term debts amounted to GH¢13.64billion. Yields on Treasury bills resumed an upward trend throughout Q2, presenting a significant risk to government’s debt sustainability.

Databank, a leading asset management company, shared insights into the Ghana Fixed Income Market (GFIM) – predicting an uptick in yields for H2-23, attributing this to subdued liquidity and growing refinancing concerns.

Tightening the monetary policy stance by 250bps and liquidity management measures by the Bank of Ghana (BoG) have constrained investor demand, resulting in high yields on the open market operations (OMO) bills and pushing investors toward T-bills.

This scenario, Databank cautioned, may lead government to accept bids at higher yields. Throughout H1-23, investors preferred T-bills for their short-term view of the market, on the back of Limited options and higher yields. The Treasury exceeded market expectations on the primary market, accepting higher yields throughout Q2-23. Despite receiving US$600million in the first tranche under the IMF programme, investors placed orders with higher yields – influenced by currency volatility, investor sentiment and elevated yields on the central bank’s OMO bills.

Furthermore, investors remain cautious about refinancing risk as government accumulates debt at the front end of the yield curve, which continues to affect T-bill yields. Yields resumed an upward trend in Q2-2023.

Yields on Treasury bill auctions experienced marginal increases as anticipated. The 91-day bill rose by 410 basis points (bps) to 22.97 percent while the 182-day bill increased by 400 bps to 25.44 percent from 21.44 percent, and the 364-day bill jumped by 359 bps to 29.25 percent from 25.66 percent. As of end-July 2023, the 91-day bill had risen to 15. 4 percent, while the 182-day and 364-day bills stood at 27.15 percent and 30.13 percent respectively.

Money market yields continued their upward trend throughout Q2-23, reaching 15-week highs for 91-day and 182-day yields, and an 18-week high for 364-day yields at the close of H1-23.

Despite some challenges, the bond market is expected to sustain its upward trend in turnover. Fiscal consolidation efforts by government have bolstered investor confidence, while upcoming coupon payments on new bonds and government’s commitment to meeting obligations on old bonds are projected to be critical drivers of market activity in Q3-23. Additionally, bond prices are likely to respond to market dynamics, external debt restructuring and a positive review from the International Monetary Fund (IMF).

The comprehensive Domestic Debt Exchange Programme’s (DDEP) second phase is underway, with government inviting investors to participate voluntarily in restructuring USD-denominated domestic bonds and cocoa bills. This restructuring process is expected to proceed smoothly, as the market has been anticipating such an offer.

The first half of 2023 witnessed a period of consolidation in the Ghanaian fixed-income market, characterised by investor confidence following approval of a US$3billion bailout by the IMF board and positive Q1-23 GDP data exceeding market expectations.

Moody’s upgrade of the country’s long-term local currency issuer rating also contributed to the market’s upside. However, foreign investor appetite remained subdued, despite a stable exchange rate outlook and cooling-off of inflationary pressures amid ongoing negotiations for external debt restructuring.

Trading activity in the bond market saw significant turnover for new bonds, indicating increasing acceptance and adoption among investors. The secondary bond market exhibited resilience amid evolving macroeconomic conditions, with an upsurge in turnover of approximately 37 percent from Q1-23. However, it fell short of H1-22 by around 86 percent.

Bond yields displayed fluctuations during H1-23 due to varying investor risk perceptions. While shorter-dated bonds and bills remained popular among investors, the 2027-2030 maturities experienced a higher average yield of 10.81 percent at H1-23. On the other hand, the 2031-2033 and 2034-2039 maturities saw lower average yields at 8.45 percent and 9.02 percent respectively.

As the second half of 2023 unfolds, market participants will closely monitor government borrowing and fiscal activities, with an eye on the impact on market yields and liquidity.