Gov't to quit short term debt market
The government has begun a gradual move away from borrowing in the short-term debt market to medium and longer dated instruments in a bid to restructure growing debt and create more space for local businesses.
The government has consequently issued a new 5-year bond to raise GH¢500 million this month to help restructure its growing debt.
The Minister of Finance, Mr Seth Terkper, told the Graphic Business on the sidelines of a meeting with fund managers and institutional investors in Accra that local businesses can finally have easy access to credit on the local money market as the government moves to longer-dated debt securities.
"We want to move away from the short ends of our securities to medium and longer-term debt issuance," he said, adding that the book runner system was part of reforms to extend maturities.
Short-term debts account for about 42 per cent of Ghana's total domestic debt, squeezing government finances’’, he said.
Many have, in the past 3 years, criticised the government’s borrowing habits on the local money market with its high Treasury bill rates. This, according to players in the business sub-sector, was depriving local businesses of access to credit for their businesses.
In the last few years, the country has been saddled with high public debt due in part to its reliance on costly domestic borrowing, a phenomenon that has raised concerns that it has entered a debt crisis.
However, Ghana expects to receive up to US$4 billion in donor funds and loans during the second half of the year and this would significantly help to boost the country's reserves in support of the cedi.
Ghana, which exports cocoa, oil and gold, has begun a three-year aid programme with the International Monetary Fund (IMF) to support its economy, dogged by slowing growth, a stubbornly high budget deficit and widening public debt.
The finance minister emphasised that it is the hope of the government to reduce its short-term borrowing on the local market.
The government has appointed Barclays Bank Ghana, Stanbic Bank Ghana and Strategic African Securities to serve as joint book runners to rally investors for the bond which will be used to support government finances.
‘’The book runners’ approach, to be used mainly for medium and long-term securities, will run on a pilot basis alongside the existing central bank auction system’’, Mr Terkper said.
Mr Terpker explained that the book-building approach was designed to be complementary to the established BoG methods of issuance and not a replacement.
The country would now use a book-building approach for a three, five and seven-year debt, similar to the method it used for Eurobonds.
The issuance of short-term instruments will continue through the weekly Bank of Ghana auction. Following a successful pilot, this approach will eventually be used for the medium to long-term issues,” he said.
“This is part of the debt management initiatives outlined in the Budget such as the Ghana Infrastructure Investment Fund, Sinking Fund, Ghana Exim, Escrow and on-lending,” Mr Terpker added.
Mr Terkper said a key objective of public debt management is to promote the development of an efficient primary and secondary domestic securities market that would provide benchmark rates for the entire economy and across maturity spectrum.
The book runners approach would be used for medium and long-term securities and would run on a pilot basis alongside the existing central bank auction system.
Figures available from the central bank indicate that the government borrowed a little above GH¢26.18billion in the first half of this year, which is more than the GH¢25.42billion it had planned to borrow from the domestic securities market.
“We’ll not go to the auction; it creates business for the market players. Our market is very shallow and you make very little money, it’ll be a good opportunity for the brokers to get more business,” he said.
A book runner is the underwriting firm that runs or which is in charge of the books and thus the lead manager in the issuance of the bond instruments.
A bond is a debt instrument that a government or a company issues to raise money. Basically, it is a contract between a government or a company which is acting as the borrower and investors who act as the lenders.
Buying a bond means lending money to the government or the institution that issued the bond, and in return, the government or the company that issued the bond agrees to pay the money back with interest at some point in the future, in this case, five years.