T-bills rate reaches 6-mth high…investors demand more

The cost of servicing governments loans borrowed from both the domestic and foreign creditors is on pace to exceed health, agriculture, energy, defence, employment and labour budgets put together, as investors demand more on government’s debt securities.

The GH¢9.34billion interest payments planned in the revised budget for this year alone — which is considered highest in the domestic debt securities market of sub-Saharan Africa — is set to jump further as a consequence of tightening monetary policies by the central bank, as well as concerns about the macroeconomy and the cedi.

Investors in government’s debt security instruments are already demanding a higher rate on government’s Treasury, which makes the likelihood of rates going up further in the near-future almost certain.

At last week Friday’s Treasury auction undertaken by the Bank of Ghana, investors’ rate demands on government’s three-month Treasury-bill reached the highest in six months, on the back of the central bank’s policy rate hike from 24 percent to 25 percent.

The yield on government’s 91-day bill, for instance, rose to 25.31 per-cent from 25.26 percent a week earlier — the highest since March 20, when the yield stood at 25.45 percent.

And when interest rates go up, so does the cost of servicing both new debt and debt that is rolled over in the form of newly-issued Treasury securities.

Over the past 14 months, government has been borrowing short-term at a minimum interest of 25 percent, contributing to a large interest burden on the public debt.

The high debt service costs have reportedly held back fiscal consolidation and complicated public debt management.

Global rating agency, Fitch, on Friday expressed concerns about the country’s high interest payments amidst a decision to affirm Ghana’s debt rating at ‘B’ with negative outlooks.

It noted: “High domestic yields and a 60% depreciation in the currency since 2012 have pushed up borrowing costs, with interest payments now accounting for one-third of government revenue — the highest level among Fitch-rated sub-Saharan African sovereigns.

“High interest service costs limit fiscal flexibility and will complicate consolidation efforts. Financing the deficit is expected to remain challenging, particularly with the IMF programme restricting deficit financing by the central bank to 0% next year.”

Fitch’s concerns is shared by Razia Khan, Managing Director, Head Africa Macro Research, Standard Chartered Bank, who also said last week that the recent rate hike by the central bank highlights the country’s “ongoing vulnerability; with the cost of servicing domestic debt raised further in nominal terms”.

As per the government’s plans as spelt out in the 2015 revised budget, total interest payment is estimated at GH¢9.34billion. Of this amount, GH¢1.6billion will be expended on external interest while GH¢7.7billion will be for domestic interest payments.

As of July this year, government had paid GH¢4.8billion as interest payment on both external and domestic debts.

According to Fitch, Ghana could see a downgrade of its ratings to negative if government fails to consolidate the budget deficit and stabilise debt levels, or to ease domestic financing constraints.

The Ministry of Finance says by the July fiscal figures available to the Ministry, government is currently in GH¢83billion in debt and is projected to continue adding to the national debt every year for the foreseeable future.

For some analysts, it is the high domestic yields that have necessitated the diversification of funding sources to more Eurobonds, which themselves have become more expensive to service with the cedi’s sharp fall.

This week, government plans to start its Eurobond roadshow in key markets in America and Europe to raise US$1.billion to finance capital projects and to also refinance maturing debts, an objective the International Monetary Fund has advised against.