Foreign Interest in Domestic Bonds Resumes …Net Investment Inflows Propping Up the Exchange Rate Again


Interest in government domestic, cedi denominated bonds by foreign investors has regained momentum after it had dropped through the second half of 2018 and the first ten weeks of 2019, resulting in investment repatriations, that eroded the country’s net international reserves by about US$ 1 billion and sent the cedi depreciating by eight percent between the start of the year and mid-March.

However, following the recent issuance of US$3 billion in Eurobonds in mid-March – which, by boosting Ghana’s international reserves to their highest level this decade, has been key in the return to relative stability of the cedi against the United States dollar and other major international trading currencies – the share of government domestic bonds holdings by foreign investors has rebounded by the end of March 2019 to about GHc 28.9 billion after dropping to the lowest level in recent times at GHc 26.6 billion in February.

The portion of Ghana’s domestic public debt held by commercial banks has also rebounded to GHc 30.9 billion, after dipping sharply to close 2018 at about GHc 25.6 billion.

During the period between the third quarter 2018 and first quarter of 2019, the accumulation of the country’s domestic debts had significantly slowed compared with the domestic debt growth rate recorded during the first half of last year.

For instance, while in October the domestic debt increased by GHc1.5 billion, by December 2018, it only increased by GHc 0.4 billion. However, accumulation of the debt has begun to recover gradually, reaching GHc 2.9 billion in March as a result of the rebound in interest in domestic debt securities, particularly by foreign investors.

According to  financial analysts the renewed momentum has largely been due to the resumed stability of the cedi which has stemmed the steep foreign exchange losses to the investments of foreign portfolio investors, as well as a major boost in the country’s net international reserves following the inflow of US$ 3 billion in Eurobond issuance proceeds as well as the US$646 million first tranche of the US$2 billion Sino-hydro funds to be executed in the first phase of the Master Project Support Agreement (MPSA). This has restored the confidence of foreign portfolio investors in Ghana’s ability to provide the requisite foreign exchange cover on their investments and is supporting the cedi’s exchange value.

The renewed positive sentiments of foreign investors are also largely their response to the suspension of monetary tightening by the US Federal Reserve Bank – whose successive interest hikes in late 2017 and much of 2018, coupled with the strengthening dollar set off Ghana’s net portfolio investment outflow in the first place – in the face of lower global growth expectations. Add to this the acceptance by foreign investors of assurances from the Government of Ghana that it will not lose its fiscal discipline following the country’s exit from the International Monetary Fund programme begun in 2015, even as general elections scheduled for late 2020 loom closer; investors have recently made much of Ghana’s poor fiscal disciplinary record in election years.

During the first quarter, government planned of raising a gross amount of GHc 11,250.00 million, of which GHc 10,149.84 million was to rollover maturities. The remaining GH¢1,100.16 million was to meet Government’s financing requirements and buffer for the period.

Of this amount, the government intend to raise GHc 4, 000 million from the 2-Year Note as well as the 3 to 5-year bonds, which are open to foreign investors. Instructively however, the quantum of debt financing secured fell well short of the target.

In this second quarter, the government plans on raising a total GHc 12,100 million from the domestic market, representing a 19.2 percent increase over the amount targeted in the first quarter of the year.

Of the total gross amount, GHc 11,533.94 million is to rollover maturities and the remaining GHc 566.06 million is fresh issuance to meet government’s financing requirements. GHc 4,150 million is expected to be raised from the 2-Year Note as well as the 3 to 15-year bonds and Finance Ministry officials are optimistic that renewed enthusiasm for Ghana’s domestic debt securities will enable the target to be met. This will be crucial to retaining the cedi’s restored exchange rate stability.