More domestic financing still an urgent agenda

Last week, government raised over GHc500 million from the issuance of 10-year domestic bonds. This is more than one and a half times the GHc300 million targeted for this particular issuance as per the public debt issuance calendar.

That government opted to accept all the bids, the huge oversubscriptions included will be worrying for public policy analysts and commentators who in recent months have expressed worries about the surge in the levels of the public debt. However, this newspaper does not necessarily share those worries; if most of the proceeds of the latest issuance are used to refinance existing debt, rather than further increase the debt levels it would rather simply elongate the average tenor of the public debt which is a good thing.

Importantly, last week’s oversubscription is a clear statement by foreign portfolio investors that the financing crisis Ghana suffered during the early part of this year is truly behind us. A few years ago, 10-year bond issuances by Ghana were still regarded as inordinately ambitious; today they are being heavily oversubscribed. Indeed, the latest issuance illustrates confidence by foreign investors that Ghana’s cedi exchange rate will be relatively stable going forward and that interest rates are expected to fall, which is why they are locking into them now.

However, none of this should lure government into a sense of comfort with the current situation. At the height of its financing challenges just a few months ago, both government and the Bank of Ghana declared their agreement that the country needs to turn to domestic sources for its medium to long term debt financing since foreign investors are influenced by too many factors and thus are flaky.

To be sure, the growing private pensions industry and the imminent expansion of retained premium income by Ghana’s insurance companies, fueled by recapitalization, can provide significantly increased portfolio investment in government’s medium to long term, cedi denominated debt securities. The question now is whether government is still interested in a switch from foreign to domestic investors now that the former has regained their mojo and the financing crisis caused by their reticence has passed.

Indeed, government is loath to lose the regular foreign exchange inflows generated by foreign investors subscriptions of cedi denominated bonds. However, it would do well to remember that this is a two-sided coin and disinvestment means foreign exchange shortages and sharply depreciating cedi. Therefore, government needs to strive to reduce its need for forex, which it can do by leading the “buy made in Ghana” campaign by example.

Besides the macro-economics, greater reliance on domestic long-term investors would set the stage for more conservative investment practices by long term fund managers such as those that manage private pensions, the investments of life insurance companies and collective investment schemes that have growth as their primary objective. This newspaper has warned that the revelations of bad corporate governance and risk management in the financial intermediation industry might be being replicated by managers of long-term funds without regulatory revelation. Shifting the regulatory goal posts with respect to limitations on their investment portfolios may be the most effective way to ensure the preservation of the funds under management.

While this may mean lower yields than their customers, who actually own the funds, it would ensure that they do not lose their capital, which is what would have happened in the financial intermediation industry if government had not opted to pick up the tab.

A combination of less volatile domestic financing of the public debt and safer havens for the medium to long term savings and investments of individuals, enterprises and institutions, surely is a good thing.