Local USD-bond could foster dollarization – Analysts warn

Whereas the government has given the indication it will do more of the domestic dollar-bonds, on the back of the maiden one’s success, some analysts fear it could weaken the cedi and deepen dollarisation of the economy.

In its weekly currency updates, South Africa’s RMB Global Markets Research said: “We are wary of this move – it could present further depreciatory pressures to the local currency due to increased FX demand by clients to purchase the bond, and may give a tacit approval of the dollarization of the economy.”

Sampson Akligoh, Managing Director of InvestCorp-an investment bank, also told the B&FT that:“I think this shift [raising dollars locally] is not healthy for the development of the local currency debt market and will strongly influence currency substitution- a situation where a foreign currency is mostly used in transaction in place of a domestic currency.”

The stability of the local currency, he said, will solely depend on the extent to which government crowds out the market with its dollar-bond issuances, and the concerns about the increasing dollarisation of the public debt and its associated USD interest rate payments.

“I sincerely wish we can avoid this for the public good. One advantage of treasury borrowing is that in difficult economic times you can pay back with a cheaper currency, but this opportunity is being eroded,” he said.

Whilst he believes the domestic USD-bonds are good for “minimizing domestic crowding out effects on the back of government borrowing,” Mr. Akligoh wishes they were targeted at “foreign investors and non-resident Ghanaian investors.”

In a press statement yesterday, however, the Finance Ministry said “going forward, the government will explore the advantages that this instrument type presents as an alternative source of funding, to finance the dollar component of future budgets,” an indication that more issuances will follow.

But the government itself has expressed concerned before regarding the over-dollarisation of the economy, which led the central bank to introduce the botched FX rules, requiring certain industries, for example, to price in cedis and not in USD.

The local currency, which has fared badly against the US dollar in the past, has done relatively better this year, depreciating by 3-4percent year-to-date; previous years have seen it dip by between 15 and 40percent.

Also commenting on the impact of the domestic dollar bond, an economist who pleaded anonymity because he has not been permitted to talk to the media said: “For a small, open economy that has narrow foreign exchange income earning options and weak macro fundamentals, this trend bodes ill for debt sustainability.”

“Even though the debt, at a coupon rate of 6percent, looks like a bargain for the government, the actual cost of this transaction over its lifetime will depend on exchange rate changes, which traditionally have not been in favour of the country,” the economist said.

The two-year maiden domestic dollar bond, which was highly subscribed, yielded an amount of US$94.64million –after attracting a total of 26 bids.

The Finance Ministry has hailed the bond as“one of the country’s lowest yield bonds aside the 2017s, which are currently trading at about 5.45percent and maturing in less than a year.”

The statement went further to add that the proceeds of this bond will form part of the Sinking Fund, a fund established by the government to repurchase or redeem specified debt, to buy back some of the high coupon instruments on the local and international capital market as part of its liability management strategy.

But Mr. Akligoh of InvestCorp warns that since this bond is targeted at domestic investors, in times of local currency shocks, domestic investors will see it as a safe haven, and may not effectively respond to interest rate increases on cedi assets.