Government resists frontloading domestic financing needs

Government has released its calendar for the issuance of cedi denominated domestic debt securities during the first quarter of 2020, with a gross targeted amount of GHc 19,087.87 million from the domestic market.

Of this amount, GHc 3,402.06 million represents fresh issuance to meet government financing requirement for the quarter, whereas GHc 15,685.81 is to rollover maturities.

The fresh issuance for the quarter amounts to about 22 percent of the total net domestic financing requirement in the 2020 budget, of about GHc 15,849 million.

This, analysts have described as encouraging, given that government is signaling some level of resistance to the temptation of frontloading its domestic debt financing in order to quickly execute projects and programmes that could favourably affect its fortunes in the impending general elections scheduled for late 2020. However, there are still worries that government may succumb to excessive debt financing to meet political exigencies during the second half of the year.

During the first half of 2019, there was a sizeable frontloading of financing requirements funded from the issuance of debt securities on the domestic market. Ultimately, government was forced to revise its fiscal deficit for the full year from 4.2 percent to 4.7 percent, and even this had been reached by November, persuading government to implement major expenditure cuts during the last two months of the year.

Based on the first quarter issuance calendar, inevitable election driven increases in public spending during the last few months of 2020 could result in significantly larger than planned deficit for the entire year unless government keeps its second quarter issuance lower than the first quarter fresh issuance target. Indeed, even if government does not engage in significant politically motivated spending as the polls get closer, the actual cost of holding the elections will take its toll.

Indeed, as government plans undertake a Eurobond issuance before the mid-year budget review, there is an opportunity to rely more on foreign financing rather than domestic financing during the second and possibly the third quarters of the year, in order to take advantage of the US Federal Reserve Bank’s decision not to tighten its monetary stance for 2020, which gives Ghana an opportunity to refinance some of its outstanding foreign commercial debt at cheaper interest rates, as well as finance part of this year’s budget more cheaply than if domestic finance is used.

The financing strategy for 2020 proposes issuances of Government securities on the domestic market and the creation of cash buffers on top of the programmed net domestic financing for active liability management and cash management purposes.

Debt Issuance

Domestic portfolio investors will have the opportunity to invest up to GHc 12,600 million in short term government debt securities which are not open to foreign investors.

This amount comprises debt securities with tenors of 91 days, 182 days and 364 days to be issued during the period, all of which are reserved strictly for domestic investors.

The remaining portion of the securities of GHc 6,487.87 million, comprising debt securities with tenors from 2 years up to 20 years, would be made available to non-resident investors as well, who have tended to dominate subscriptions of such medium to long-term issuances to date.

The calendar is based on the Net Domestic Financing provided in the 2019 Budget, the domestic maturities and the Medium-Term Debt Management Strategy (MTDS) for 2019-2022.

The Calendar also takes into consideration Government’s liability management programme, market developments (both domestic and international) and the Treasury and Debt Management objective of lengthening the maturity profile of the public debt.

Per this calendar, government aims to issue weekly the 91-day and 182-day bills, whereas the 364-day bill will be issued bi-weekly, through the primary auction with settlement being the transaction date plus one working day.

For securities of 2-year up to 7-year, government will issue them through the book-building method.

An amount of GHc 1,000 million and GHc 1,500 million will be issued through the 3-year bond in January and March 2020, whereas an amount of GHc 1,000.00 million through the 5-year bond will be issued in March, 2020. In February 2020, GHc 900 million will be issued through the 7-year bond.

An amount of GHc 287.87 million worth of 20-year bonds, which is expected to be issued as a shelf offering, will be re-opened based on investors request and on market conditions, the statement said.

Consistent with the MTDS, government indicates that it may announce other tap-ins/reopening of existing instruments depending on market conditions.