Yields will fall slowly - BoG

The Bank of Ghana (BoG) says Treasury yields will fall slowly from record highs as government restructures its debt profile and reduces demand for short-term funding.

Adams Nyinaku, the BoG’s Head of Treasury, told the B&FT demand for short-term debt has stabilised in recent weeks, which has caused yields to fall marginally -- in line with a plan to cut the cost of public-sector borrowing.

Yields on 91- and 182-day government paper dropped from 22.77 percent and 22.39 percent to 22.64 percent and 22.26 percent respectively during the last three auctions. The one- and two-year notes also fell from 21.95 percent and 22.2 percent to 21.89 percent and 21.95 percent respectively in the same period.

This trend is set to continue as demand for the bills may even soften in the coming weeks, Mr. Nyinaku said.

“We’re restructuring the debt. In recent weeks, demand for the short-term bills has stabilised and government has not been taking the excess offers. The demand may even go down.”

Debt restructuring has emerged as a fiscal policy priority after public-sector borrowing costs surged in 2012 due to a weak currency and monetary tightening to rein-in growth-driven excess import demand.

Government has committed US$363million (GH¢726million) of its US$1billion July Eurobond to refinance short-term domestic debt, whose yields have been above 20 percent since at least the second quarter of 2012. On the contrary, the coupon on the Eurobond is 7.875 percent, which implies significant savings on interest payments.

The cost of domestic debt servicing was GH¢1.8billion in the first half of the year, accounting for around 15 percent of total government expenditure in the period.

Government’s restructuring strategy includes issuing longer-tenor bonds with relatively lower yields. Last month, the BoG auctioned the first seven-year government bond to local and foreign investors, selling GH¢101.6million of the debt at a coupon rate of 17.5 percent.

Mr. Nyinaku said the difficult fiscal situation, with a budget deficit that rose to 11.8 percent of GDP during elections last year, kept yields high in the first half of 2013 -- but added yields will head downwards as the public finances improve.

Finance Minister Seth Terkper is confident plans to slash the deficit to 9 percent of GDP will succeed, despite slow decision-making by the Public Utilities Regulatory Commission (PURC) on an imminent increase in power and water tariffs.

A gradual fall in government borrowing costs will create conditions for lower bank-lending rates, which will support economic growth, Mr. Nyinaku said.