No cause for alarm over domestic dollar bonds
The Minister of Finance, Mr Seth Terkper, has downplayed concerns by the commercial banks that the recent domestic dollar bond issued by the government would out-compete local banks in dollar mobilisation.
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At a news conference in Accra, Mr Terkper said commercial banks did not have cause to panic since the move would rather benefit the banks.
“Government policy has benefited the banks, which is the reverse of what the banks are talking about now, what they are saying here is that we are mopping dollars from their deposits and it will lead to competition by government. But you saw the reverse where government action also benefited the banks when about $500 million was used to pay domestic debt,” he said.
He was of the view that the government at the time incurred higher cost when the interest rate on the bond was at 10.75 per cent, even though it is now around 10 per cent.
“At the time, government was criticised for borrowing at 10.75 per cent even though those bonds are now trading at below 10 per cent. We did not see the banks point to the benefit,” he said.
Directors of some commercial banks have expressed worry over the move by the government to issue dollar bonds after a maiden one proved successful, which raised $94.6 million.
This, they say, will lure some investors to convert their local currency into dollars in order to participate in the bonds, while those with dollar accounts will withdraw their monies from the commercial banks and invest in the government bonds, which has a higher interest rate.
But Mr Terkper explained that the transaction was done through the Book Builders Approach with the participation of the banks.
He pointed out that the transaction was also limited to participants with accounts, and not done over the counter.
Secondary market
The finance minister insisted that the banks could §not criticise the bond since it was also being traded on the secondary market where the banks were participants.
“The point I am trying to demonstrate is that we have been mindful of the impact of government borrowing in terms of liquidity, in terms of crowding, in terms of interest rates on the economy. If you look at that amount that we are raising which is 90 million dollars compared to the 250 million dollars in the 2014 bonds to do refinancing, we have used in excess of 500 million dollars to do domestic refinancing you will see that the balance is more in favour of banks and the domestic market in easing pressure off the domestic market instead of putting pressure on the domestic market,” he added.
The Ministry of Finance announced its intention to issue more of the USD bonds locally, following the success of the first one, for which the initial amount government wanted to raise was US$50million.
In a press statement, last week, the ministry said, “Going forward, government will explore the advantages that this instrument type presents as an alternative source of funding, to finance the dollar component of future budgets.”
The two-year maiden domestic dollar bond, which was highly subscribed, yielded an amount of US$94.64million –after attracting a total of 26 bids.
The Ministry of Finance has hailed the bond as “one of the country’s lowest yield bonds aside from the 2017s, which are currently trading at about 5.45per cent and maturing in less than a year.”
Debt instruments
The government is pursuing a strategy to restructure the country’s debt, part of which includes issuing long tenor debt instruments to replace shorter term ones. In some instances, the government buys back some of its bonds which may be trading at lower coupons.
“The issuance of this bond gives further impetus to the government’s Medium-Term Debt Management Strategy, which, among others, focuses on minimising and/or replacing expensive shorter dated instruments with longer dated issuance.”
“It also provides a positive boost to the development of our domestic debt market by introducing a new investment instrument for institutional and individual investors”, the statement explained.
The government believes the successful issuance of the bond, evidenced by the generally high subscription and the favourable pricing, “is a reflection of the returning confidence in the Ghanaian economy and further confirms Ghana’s bright medium-term prospects”.
