T-bill rates tumble as new strategy on debt kicks in
Interest rates on short-dated securities have responded to the government's new strategy on debt management by falling from 22.78 per cent in January to 18.6 per cent in November, this year, the first in about four years.
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After opening 2016 at well over 22 per cent, interest paid on the 91-day and 182-day treasury bills remained above 20 per cent between January and October but eased to 18.6 per cent, thanks to the new public debt management policy, which ensured that the government reduced its appetite for such instruments while ensuring that a large chunk of the matured ones are redeemed rather than rolled over.
Instituted some three years ago, the debt servicing strategy gives the Ministry of Finance a variety of options, including an opportunity to either buy back existing debt, using relatively cheaper debt or retire matured ones, mostly the treasury bills, fixed notes and bonds.
The debt buyback, which is the first in the country’s history, has been boosted by the Sinking Fund, one of the revenue pools that is funded by proceeds from oil.
With the Sankofa Gas Fields and the Tweneboah-Enyera-Ntoume (TEN) project, the Finance Minister, Mr Seth Terkper, said inflows into the fund would increase, thereby strengthening the country’s debt management policy that allows bonds to be paid down.
“Even at the current oil prices, the flows will increase and we are confident that we can build the Sinking Fund, and Ghana will be like Philippines and other countries that have proper sinking funds and debt management policies of paying down their bonds,” he said.
Apart from standard loans that the country was able to pay down the principal and the interest, loans from bonds have never been paid down as “a bad habit of paying down only interest” persisted till now.
Impact on businesses
The drop in treasury bill, fixed notes and bond rates has already combined with the stability in the fiscal side of the economy, a rebound in consumer and business confidence and the recent ease in annual inflation to push the Bank of Ghana's benchmark rate, the policy rate, down by 50 basis points.
Although minimal, the Finance Minister said the simultaneous drop in the rates was a strong indication that the new debt management strategy is yielding the desired results.
"One thing that we need to take notice of is that treasury bill rates are falling and they are falling because I am no longer coming and rolling over; I am rather using outside money to buy off the domestic debt and because of that the banks are being left with liquidity," Mr Terkper told the GRAPHIC BUSINESS on November 27.
After enjoying a debt-forgiveness programme under the Highly Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) in 2006, Ghana rediscovered its strong appetite for debt, majority of which came from the Treasury bill side of the domestic debt component.
But instead of retiring or redeeming matured ones, the country ran into the habit of always rolling over the principal, which meant that T-bills issued at 25 per cent for 90 days could become one year debts at similar rates.
This combined with a similar habit in the bond market, where three to 15 year bonds issued in the foreign and domestic market are always rolled over instead of the principal being paid down.
“This is not prudent and risky to the country's debt servicing capabilities,” Mr Terkper said.
"In all these cases, what happened was that we never paid down the principal in a substantive way. All we did was to always pay interest and then rollover, interest and then rollover, but when you do that your next deficit and financing will add to the debt and because of that you are just adding things up."
"So, the biggest risk we faced was rollover risk and the biggest one that loomed was the 2007 bond that will be due next year," he said, referring to the country's maiden Eurobond issued nine years ago.
"In 2013, when we put the debt management strategy in place, we realised that if we did not start doing something about these bills and bonds, Ghana will get to a point where we can never redeem," he said.
"If I come to the domestic market and I say I want to rollover, the banks will flock in and the same applies to funds like pension funds that should be in the long term end of the market.