T-bills interest rate reduction: No easy way out — Medium to long-term risk persists
The reduction in the coupon rate on treasury bills (T bills) is only a short-term solution to the government’s challenge of rising interest expense, a financial analyst has said.
While maintaining that the reduction in government dated securities will definitely help reduce government’s overall expenditure, the analyst warned that the measure may,however, in the medium to long- term render T-bills unattractive to new investors and discourage potential roll-overs from existing investments.
This, he said, will depend on the options available to investors and how those investments compare to T-bills would offer them the best returns.
The Senior Manager, Financial Advisory, Deloitte Ghana, Dennis Brown, was speaking to the Graphic Business in an interview in reaction to the government’s latest handling of interest payments of treasury coupons.
“Where investors find alternative options as too risky for the returns they were promise, the T-bills may still retain their attractiveness, considering that it is largely regarded as the safest investment type for many investors.
In case the opposite suffices, the government will likely face a situation where it is unable to raise adequate funds from the domestic capital market to support its programmes.”
Last week, the government took a drastic step in its quest to reduce its interest payments to create the badly needed fiscal space within the economy.The government, in its weekly auction of bills on Friday, March 3, rejected the entire bids from primary dealers, insisting that the offer rates of above 35 per cent were not conducive.
It then re-tendered that week’s auction the following Tuesday, March 7, during which it received bids in excess of GH¢6.151 billion at significantly lower rate of 24 per cent.
It, however, accepted only GH¢4.5 billion at the lower rates, according to the tender results published by the Bank of Ghana.
The government had targeted to raise GH¢2.77 billion during that auction window.
Financial watchers and investment analysts have largely welcomed the reduction in government dated securities, pointing to the domestic debt exchange programme as a precursor for lower interest rates regime in the country.
Interests on government dated securities were among the highest in the world, with the 182-day treasury bills trading well in excess of 35 per cent.
Mr Brown explained that the logic behind reducing the T-bills coupon rates is to reduce the government’s interest expense on domestic borrowings, which, in the short-term, will provide some respite to the government in terms of how much it spends on interest payments on T-bills.
Government dated securities
The rate for the 91-day bill fell to 24.16 per cent on Wednesday, March 8 from a peak of 36 per cent during a re-auction of the short-dated securities.
Rates for the 182- and 354-day bills also fell to 26.5564 per cent and 27.544 per cent respectively – also the lowest in almost nine months.
Finance Minister Ken Ofori-Atta, had earlier met with industry players where he expressed concern about the dissonance in the treasury yield curve, where short-dated securities were trading at rates higher than those of long-dated instruments that were recently restructured.
A source told the paper that the informal meeting, in the last week of February, also discussed the way forward for the primary market, which is critical in government’s debt exercise, to the development of the economy.
Other analysts have described government’s action as what they described as ‘deliberate arm-twisting’ in view of the fact that presently, there are no other options for investors within the economy except for T-bills, considered relatively safer compared to the bonds.
The development is also strange in view of the high rate of inflation which completely erodes any gains made on T-bills.
Meanwhile, industry watchers are monitoring the situation closely in their quest to find ways around the government’s action to ensure that what they have lost in the just completed Domestic Debt Exchange Programme (DDEP) was recouped to enable them to stay afloat in business.
The DDEP, which was carried out by the government, has received a negative public reaction although government described the exercise as a huge success.
Many institutions, particularly those in the financial services sector, which were forced to participate in the programme under a disguised term “voluntary.” are dreading the outcome of the exercise because of the impact on their bottom lines for this year.
The government achieved a participation rate of 85 per cent, representing tendered bonds of GH¢83 billion out of the total eligible bonds of GH¢97.7 billion.
The GH¢83 billion bonds that were successfully tendered also represent 64 per cent of the outstanding domestic debt stock of GH¢130 billion at the end of December 2022, as pension funds have been expressly exempted from the DDEP.
The government has successfully exchanged all its old and outstanding bonds for 12 new bonds with coupon or interest rates hovering around single digits. For this year, the government says it will pay five per cent interest on all bonds that mature this year.
Subsequently, interest payments from next year to 2037 will attract a nine per cent interest rate.
The government currently is negotiating with external creditors on pushing down the interest and extending its credit terms as part of conditions to access an IMF bailout of US$3 billion to balance its books.