Domestic Financing Of Gov’t Debt, Budget Getting Expensive

Amid the incessant rise of consumer inflation and gloomy expectations, government is incurring more costs to refinance its local debt as well as the budget, given investors’ demand for higher yields across the various securities on the domestic market, analysis of market data has shown.

Currently, inflation is increasing with strong momentum, spiralling to 19.4 percent year on year (y/y) in March 2022, reflecting an increase of 370 basis points (bps) from February 2022 as both food and transport costs weigh.

However, the monetary policy rate at 17 percent, compared to inflation denotes negative real returns when compared to the average yield on the benchmark 91-day Treasury bill at around 16.33 percent, the latest result from government securities auction has shown.

Although yields on T-bills are lower compared to Bank of Ghana Bills, there has been some level of increase in the yields. For instance, since the hike in the policy rate, yields on the 182-day bill advanced by 271bps to settle at 16.32 percent, while the 91-day bill rose by 291bps to clear at 16.33 percent. Similarly, the 364-day bill climbed up by 189bps to settle at 18.85 percent.

Apakan Securities Limited, in its analysis of the market activities for last week, highlighted that investors have repriced their yield expectations much stronger.

“Investors repriced their yield expectations much stronger at the close of last week’s money market auction, as the March 2022 inflation print eroded positive real returns on treasury bills,” it said.

“Unfavourable liquidity conditions in the market continue to weigh on the treasury’s targets in four consecutive auctions. The treasury was able to raise a total amount of GH¢776.59million tendered across 91 to 364-day bills by investors,” it added.

This compares to the treasury’s target of GH¢1billion and reflects a shortfall of 22.65 percent. Also, the intake by the treasury remains insufficient to cover up the sum of maturing debts of GH¢965.79million between 91 and 182-day bills, thus, translating into a possible maturity cover of 0.80x.

The market foresees further upside to yields on the primary and secondary markets as investors will re-adjust their yield expectations higher. This should lead to a jump in yields, especially at the front end of the curve in the coming sessions.

Inflation expectations

The market perceives risks to inflation in the near term largely driven by food price increases. Consequently, Apakan projects headline inflation for April 2022 to print around 20.25 percent +/- 0.5 percent.

Despite the 250bps rate hike by the Monetary Policy Committee (MPC) of the Bank of Ghana during the March 2022 meeting to control inflation and expectations, the new inflationary development has widened the spread between the policy rate and inflation by 240bps.

On the back of this, Apakan expects the MPC in its next meeting in May 2022 to raise the rate further. “Given looming inflation and expectations, we expect to see a further rise in the policy rate to control inflationary expectations as well as boost investor confidence in the local market.”