Finally, after having to rely on foreign portfolio investors to buy up Government of Ghana medium and long-term debt securities for the past decade since they were first opened up to non-resident investors, the country can now look up to local investors to subscribe to a significant portion of public debt issuances with tenors of two years and more.
A new report issued last week by Moodys’, one of the three international credit rating agencies that tracks Ghana’s sovereign debt ratings, reveals that banks in the country have tripled the proportion of their government debt security holdings held in medium term instruments, even as the private pensions fund industry, having already quickly reached the regulatory limits on their investments in equities listed on the Ghana Stock Exchange, are now also turning to medium and long term government domestic debt securities.
The Moodys’ report shows that banks in Ghana had 87 percent of their holdings of government debt securities in medium term treasury bonds, as at January 2018, up from just 29 percent as at October 2018. This is very substantial; investment securities accounted for 31 percent of total banking industry assets by December 2017.
Longer dated bond exposure of the banks has increased by 15.4 percent to GHS8.383 billion between October 2016 and January 2018, while their exposure to short dated treasury bills has conversely fallen by 84 percent to GHS1.261 billion over this period.
The sharp shift by the banks from short term treasury bills and notes – with tenors of between 91 days and one year – is in response to the steep decline in short term interest rates which has returned Ghana’s financial markets yield curve to a positive slope since 2017, after five consecutive years of an inverse yield curve, in which short term yields were higher than long term yields, contrary to usual financial market structure.
Yields on 91-day treasury bills has fallen by 753 basis points to 13.3 percent as at January 2018, down from 20.8 percent as at November 2016.
Similarly, the yield on 182 treasury bills has fallen by 868 basis points to 13.9 percent, down from 22.6 percent over the same period.
Conversely, the yield on two-year treasury bonds has fallen by just 582 basis points, to 17.2 percent, from 23 percent.
The shift by the banks to longer dated securities aims to stem the sharp slowdown in their interest income, caused by falling interest rates across the economy.
Banks annual growth in interest income slowed to 17.3 percent in 2017, down from 29.2 percent in 2016.
But while the banks are moving from short term government debt securities into medium term treasury notes and bonds primarily of two and three years tenor – being constrained by the fact that most of their customer deposits are short term, rarely exceeding one year – the phenomenally growing private pension funds can afford to invest into much longer dated treasury bonds.
Government has progressively increased the maximum tenors of its debt securities, and now issues bonds of up to 15 years, more than twice the maximum tenor of seven years as recently as four years ago.
Private pension funds under management have grown substantially to reach GHS9.7 billion by the end of 2017, equivalent to 4.5 percent of Gross Domestic Product, and up from GHS6.8 billion as at the end of 2016. During the last quarter of 2017, government released GHS3.1 billion in private pension funds hitherto held in a temporary pensions account held by the Bank of Ghana and invested in short term treasury bills.
At the same time, it increased the cap on the proportion of pension scheme contributions that can be invested in equities listed on the Ghana Stock Exchange, from 10 percent to 20 percent.
This fueled a ferocious bull market on the GSE, that saw its all share index climb by 33 percent in the first two months of 2018 alone, thus making it the best performing stock market in Africa at the time.
Instructively, the index has virtually flattened out since then, in part because many of those bullish pension funds have reached the regulatory limit with regards to the proportion of their funds they can invest in equities; by the end of last week the GSE composite index had delivered year to date returns of 34.56 percent and the financial index, 37.45 percent.
Indeed, these pension funds, subject to strict restraints on the proportion of pension contributors they can invest in corporate debt, collective investment schemes and real estate, as well as listed equities, are now looking to long term government debt as a prime investment outlet.
This has the loosest restrictions; they are allowed to invest up to 75 percent of their funds in government debt and since their funds are long term in nature and long-term yields are now higher than short term yields, this has become their most attractive option.
Until these new developments in Ghana’s financial markets, Ghana had to rely on foreign institutional investors to buy up close tom 90 percent of their medium to long term bond issuances. With the new emergent interest by both the banks and the pension funds, Ghana can now rely on its own domestic institutional investors.