Foreigners Losing Taste for Ghana’s Bonds as Budget Gap Widens

ACCRA (Capital Markets in Africa) – Foreigners are losing their taste for Ghanaian local-currency debt.

Offshore investors bought 38 percent of the 989 million cedis ($204 million) of three-year bonds the government sold on October 18, according to data from Central Securities Depository Ghana Ltd. That’s down from 53 percent at a similar sale in September last year, and as much as 80 percent of an offering of five-year debt two months before that. An auction of five-year debt was canceled in September for lack of demand.

The decline in appetite comes as Ghana struggles to raise cash to finance its budget deficit, at a time when investors’ appetite for risk is waning as U.S. rates rise and the dollar strengthens. The government missed its fiscal-deficit target for the first seven months of the year as tax revenue fell short of estimates, according to data published on the Finance Ministry’s website.

“On the domestic side there are challenges with regards to government fiscal account,” Gaimin Nonyane, a London-based economist at Ecobank Transnational Inc., said by phone. “On the external side, rising U.S. interest rates and policy tightening have led to increased risk aversion towards emerging markets and frontier markets.”

Foreign purchases of two-year debt dropped to 16.7 percent in October, from 52 percent a year ago, the CSDG data show.

Apart from straining government finances as borrowing costs climb, the decline in foreign inflows are also hitting Ghana’s cedi, which has weakened 6.9 percent this year. Three-year bonds sold in October paid 19.5 percent, compared with 16.5 percent in the first quarter. Secondary-market yields on five-year notes have jumped 381 basis points since March to 19.39 percent.

Ghana recorded a budget deficit of 3.8 percent of gross domestic product for the first seven months through July, overshooting the forecast of 3.3 percent. Tax revenue fell 9.4 percent below the target, leaving the government short of about 2.5 billion cedis.

‘Contagion Effect’
“Once a while we see the contagion effect in terms of sentiment,” Governor of Bank of Ghana Ernest Addison, told Bloomberg TV on Oct. 23. “It has an impact on the currency when investors start to exit the market.”

The Ghana Central Bank left its policy rate unchanged at 17 percent at its last two meetings after cutting it by 650 basis points since March last year.

“There’s a bit of shortage of liquidity on the market due to government’s inability to meet revenue targets,” Edem Harrison, an economist at Accra-based Frontline Capital Advisors Ltd., said in an interview. “Rates are also rising from a sentiment point of view and because the government is forced to borrow more to meet the budget execution.”

Source: Bloomberg Business News