The Treasury continues to face elevated short-term yields primarily due to the government’s heavy reliance on T-bills, compounded by persistently high inflation and the subsequent monetary policy measures implemented to counter inflationary pressures.
Recent data from auctions conducted on September 8, 2023, revealed a concerning interest rate of 32 percent for the 364-day T-bill, while the 91-day T-bill hovered just below 30 percent. These figures underscore the government’s limited alternatives, the high cost of borrowing, and the lingering threat to debt sustainability.
Investors are demanding higher yields at T-bill auctions due to increased inflation risks, low real returns on fixed-income investments, and market uncertainties. This demand has partly offset the interest savings achieved by lowering T-bill yields following the Domestic Debt Exchange Programme (DDEP).
The government’s strategy to reduce yields after the DDEP resulted in a 17 percent decline in the 91-day T-bill rate, from 35.75 percent pre-DDEP to 18.53 percent by March 20, 2023. However, yields have risen since April due to continued domestic borrowing and limited external funding. Investors are seeking compensation for economic uncertainties, leading to T-bill clearing yields ranging from 27.8 percent to 32 percent.
In recent Treasury auctions, yields have further increased, with the 91-day, 182-day, and 364-day bills settling at 27.79 percent, 29.12 percent, and 31.97 percent, respectively. These rates have surged since the beginning of the first quarter of 2023, with the 91-day bill rising by 840 basis points (bps), while the 182-day and 364-day bills have increased by 768 bps and 631 bps, respectively.
These T-bill yields now surpass the coupon rates on restructured bonds. The tight monetary stance is likely to continue pushing yields higher until the government secures concessional funding alternatives.
In August 2023, the government faced escalating borrowing costs, with the 91-day bill increasing by 178 bps to 27.02 percent, the 182-day bill by 147 bps to 28.62 percent, and the 364-day bill by 93 bps to 31.24 percent. The Treasury successfully sold GH¢12.35 billion worth of bills to cover GH¢10.18 billion in maturing bills, resulting in a maturing cover of 1.21x.
The government aims to raise GH¢3.76 billion in the upcoming auction on September 15, 2023, highlighting its ongoing need for funds. With policy rates at 30 percent amid elevated inflationary pressures, higher Treasury rates are expected to persist in the near term.
The mounting borrowing costs pose a challenge to the government’s already strained fiscal position, making it difficult to manage existing debt and fulfill future financial obligations.
Monetary response to inflation
In response to emerging inflation risks, the Monetary Policy Committee (MPC) of the Bank of Ghana has implemented a more restrictive monetary policy stance. This shift will have a significant impact on Treasury securities, particularly the 91-day to 364-day T-bills, which are expected to face an extended period of higher yields.
During its July 2023 policy meeting, the MPC raised the policy rate by 50 basis points (bps) to 30 percent, aiming to address inflation risks and the need for substantial tightening in both fiscal and monetary policy frameworks.
Despite a decline to 40.1 percent in August 2023, inflation in Ghana remains elevated, with only Sierra Leone (44.98 percent), Sudan (63.3 percent), and Zimbabwe (77.2 percent) experiencing higher rates. Nearby neighbors Côte d’Ivoire and Togo report significantly lower inflation rates at 4.6 and 3.8 percent, respectively.
Despite efforts to restructure the nation’s debt portfolio, the updated public debt stock, excluding debt from state-owned enterprises and special purpose vehicles (SOE/SPVs), has shown significant growth. This is primarily attributed to an expanding domestic debt burden and earlier exchange rate fluctuations.
According to the Bank of Ghana’s summary of macroeconomic and financial data published in July 2023, the total debt stock increased by 21.3 percent from December 2022 to GH¢569.3 billion (equivalent to 71.1 percent of GDP) by April 2023. The domestic debt component rose by 6.29 percent, reaching GH¢247.9 billion (equivalent to 30.95 percent of GDP), while external debt in cedi terms surged by 33.41 percent, reaching GH¢321.4 billion (equivalent to 40.13 percent of GDP).
The government’s ongoing struggle to manage rising borrowing costs, combined with inflationary pressures and a tighter monetary policy rate, underscores the challenges confronting fiscal and economic stability. With the likelihood of even higher yields on the horizon, the government faces a challenging task in navigating these turbulent financial conditions.
Looking ahead, the market anticipates that yields on Treasury bills will continue to rise, albeit at a slower pace, as the Treasury adjusts its bids in response to persistent demand pressures.