Government’s domestic debt securities issuance calendar for the second quarter of 2021 issued last week through the Ministry of Finance is facing challenges and is expected to be revised shortly. Usually, each quarterly calendar is issued at the start of the quarter; the one month delay in issuing this one illustrates the increasing complexities that government is having to grapple with as the public debt balloons in response to the effects of COVID 19 as well as both the energy sector legacy debt and the cost of the financial sector bail out.
More instructively though the delay reflects government’s ongoing difficulties in meeting its targets for its shortest tenor securities issuances of 91 days and 182 days.
For the second quarter, government plans to issue a gross amount of GH¢21,430.00 million, of which GHȼ17,301.00 million is to rollover maturities. The remaining GH¢4,129.00 million is fresh issuance to meet Government’s financing requirements.
However, outcomes for the first of the three months in the quarter – April – have not gone according to plan as it has failed to meet its targets for short term securities every week throughout the month.
Under the calendar, government has aimed to issue cedi denominated debt securities to the tune of GHc8,420 million in April; GHc7,080 million in May; and GHc5,930 million in June.
Altogether, during the quarter it is issuing GHc11,300 million worth of 91 day treasury bills; GHc5,560 million in 182 day treasury bills; GHc1,570 million in 364 day treasury notes; GHc2,000 million in five year bonds and: GHc2,000 in seven year bonds. In unusual fashion government will not issue any two year treasury notes, nor any three year bonds this quarter. Neither is it issuing any long term bonds with tenors beyond seven years.
The plan illustrates government’s determination to minimize its domestic debt servicing costs by issuing mainly short term securities – whose coupon rates have dropped considerably to below 14 percent since the Bank of Ghana commenced its monetary easing policy stance a year ago, in response to the economic activity dampening impact of COVID 19 – rather than longer term securities some of which have seen yields rise over 20 percent through secondary market trading. This is a reversal from its strategy, over the past decade of seeking to elongate the average public debt maturity profile by issuing longer term securities which reduce refinancing costs and associated rollover risks.
The snag in the current strategy is that investors, in response to the resultant deepening of the yield curve are opting for longer term, higher yielding securities, secure in the knowledge that with the Ghana Fixed Income Market now liquid and vibrant, they can sell their securities for liquidity whenever needed.
But the latest debt calendar shows that not only is government sticking to its guns; it is actually intensifying its strategy. It is not issuing any bonds of more than seven years tenor despite the market now readily accepting tenors of up to 15 years. This despite its difficulties in selling its shortest tenured securities and investors’ clear willingness to buy larger volumes of medium to long term securities than government is offering.
Indeed, government is still rejecting the excess demand for longer tenured securities despite the shortfalls in subscription for short-dated securities.
Financial analysts however agree that if the situation persists into May government will have to adjust its strategy which would require adjustments to the 2nd quarter debt calendar. Such adjustments are allowed as the calendar is a rolling one that can be adjusted each month in response to evolving market conditions. The anticipated revision would involve a reduction in short term issuances and an increase in longer term issuances of one year tenor and longer, which in turn would increase the public debt servicing cost.
However, government may not have a feasible choice as it needs to finance a 9.5 percent of Gross Domestic Product fiscal deficit this year, the first step towards bringing the deficit down from 11.7 percent – caused by the unusual circumstances imposed by COVID 19 – back to below five percent by 2024; the upper limit set by the Fiscal Responsibility Act, which however has been temporarily suspended because of the impact of the viral pandemic on government’s finances.
The alternative – more foreign debt issuances – is unlikely as the international capital market investors are demanding coupon rates that are too high for government’s liking which is why it only took US$3 billion through its latest Eurobond issuance in March this year rather than the US$5 billion it had originally planned to take.
The Calendar is developed based on the Net Domestic Financing provided in the 2021 Budget Statement and the Medium Term Debt Management Strategy (MTDS) for 2021-2024. It depicts securities that are intended to be issued in respect of Government’s Public Sector Borrowing Requirements for the period April to June, 2021.
In addition, the Calendar also takes into consideration Government’s liability management programme, market developments (both domestic and international) and the Treasury & Debt Management objective of lengthening the maturity profile of the public debt.
Per this calendar, Government aims to build benchmark bonds through the issuance of the instruments as follows:
- the 91-day and 182-day will be issued weekly;
- the 364-day bill will be issued bi-weekly also through the primary auction with settlement being the transaction date plus one working day;
- securities of 2-year up to 7-year will be issued through the book-building method;
- consistent with the MTDS, Government may announce tap-ins/reopening of other existing instruments depending on market conditions.
Government intends to update the Issuance Calendar on a monthly rolling basis, to reflect a full quarter financing programme.