Weak cedi casts shadow on bond

The Bank of Ghana will sell a five-year bond in June that could see the country’s borrowing costs rise because of a weak currency and uncertainties in an election year.

The sale will seek to raise GH¢200 million at fixed interest from local and offshore investors, Adams Nyinaku, Head of Treasury at the bank, told the Business & Financial Times.

The yield on the bond could potentially be higher than the 14.25% coupon rate on the last sale in August and December 2011. This is due to the falling cedi and the Central Bank’s readiness to hike interest rates to stem the slide. Uncertainties relating to the elections in December could also be a factor pushing up yields.

In February, the government’s three-year borrowing costs rose from 14% to 15% during an auction that came in the wake of a steep decline in the value of the cedi to the dollar. Yields on short-term government debt have also risen at recent auctions: the 91-day bill rate rose to 13.21% from 12.61% at the last auction on March 30.

The local unit has been falling over high corporate dollar demand and rising imports which cost 43% of Ghana’s GDP in 2011, up from 35% in 2010. Between January and March 2012, the cedi slumped by 8.5% against the greenback, reaching new lows on several trading days in the foreign exchange market.

On Tuesday, the Central Bank quoted the USD-GHS rate at 1.68 among banks and 1.75 in the forex bureau market.

The cedi’s weakness has persisted despite an interest-rate hike by the Central Bank on February 15, which Governor Kwesi Amissah-Arthur said was purposed to rein-in the fall by attracting investors to cedi-denominated assets.

The bank’s policy-setting committee will determine at its meeting this week whether the cedi’s continued fall warrants further support before it triggers an inflation debacle. Consumer inflation has so far shrugged off the impact of a weak cedi, dropping slightly to 8.6% in February as both food and non-food price-increases slowed. The bank raised its policy rate by 100 basis points to 13.5% at its last meeting.

Though the government had said in its 2012 budget that it would introduce seven- and 10-year bonds to the capital market this year, Adams Nyinaku said the issue calendar for the next six months does not include any such sale.

“I know the Finance Minister mentioned it in the budget, but what we have on the calendar from now to September is a five-year bond,” he said.

Asked whether a seven- or 10-year bond would be feasible this year, Deputy Finance Minister Seth Terkper told the B&FT: “This is part of our long-term infrastructure plan. And as for the Minister saying the bonds will be sold this year, we’re only four months into the year, so we should wait and see.”

Answering a question about what yield the government would be targetting if it sold a seven- or 10-year bond, Mr. Terkper stated: “We’re looking for the lowest yield possible.”

He said the government is reviewing the way debts of state-owned enterprises (SOEs) are accounted for and managed as part of ongoing fiscal reforms.

“Gone are the days when we secured a loan for a state-owned enterprise and put it on the budget. Now, we want them to be responsible for their debts. That’s why we make sure the commercial loans that we contract are put into projects that pay for themselves.”

Last year, the government’s budget-deficit shrank to 4.3% of GDP from 6.8% in 2010 after spending was kept within target and revenues exceeded projections, which authorities said was evidence of tax-reforms beginning to bear fruit.

source:B&FT