Ms. Gifty Annor-Sika Asantewah, a Financial Market Analyst and the President of Women In Forex Ghana has disclosed that the recent undersubscription in government of Ghana’s short term debt instrument is a worrying sign of investors’ belligerent attitude towards government’s fiscal management.

Ms Annor-Sika in an interview with the Vaultz News, divulged that despite the positive returns on these short-term debt instruments (with inflation at 22.8%, less than the interest rates on Treasury Bills), “highlights growing investor concerns over the government’s fiscal health”.

“A huge undersubscription of government T-bills can signal a lack of confidence among investors regarding the government’s ability to manage its finances effectively. In this case, the low subscription rate indicates that investors may be wary of the government’s fiscal policies, debt levels, or economic outlook.”
Ms Annor-Sika

The Treasury Bills, typically considered a safe investment due to their government backing, are usually popular among investors. However, the analyst iterated that the recent trend of undersubscription suggests a shift in investor sentiment. “This shift could be attributed to several factors, including concerns about the government’s ability to manage its finances effectively, rising public debt, and potential political instability,” she said.

Explaining further, Ms Annor-Sika noted that for investors, the decision to pull back from government securities could be driven by fears of a deteriorating fiscal environment. “When investors perceive higher risks, they demand higher returns, and the undersubscription of T-bills may reflect a lack of adequate risk premium to compensate for these perceived risks.”

Possible Reasons for the Undersubscription

Highlighting some other possible reasons for the undersubscription at the short end of the market, the analyst noted that one of the primary reasons for the undersubscription is the reduced liquidity held by primary dealers, mainly commercial banks. “These institutions are trying to comply with the new cash reserve ratio requirement implemented by the Central Bank.”

According to the analyst, this regulation requires banks to hold a higher percentage of their deposits as reserves, reducing the funds available for investing in government securities. “Consequently, banks have less liquidity to participate in T-bill auctions, leading to lower demand for these instruments,” she stated.

“Additionally, the new cash reserve ratio requirement aims to increase lending to the private sector. By restricting the amount of funds banks can invest in government securities, the Central Bank hopes to encourage banks to lend more to businesses and individuals. While this policy can stimulate economic growth by providing more credit to the private sector, it also reduces the demand for T-bills, contributing to the undersubscription.”

On Friday, July 19, the government raised GHS 3.86 billion through the issuance of short-term debt instruments, falling significantly short of its GHS 5.31 billion target. This resulted in an undersubscription rate of 37.45%, leaving a substantial funding gap of GHS 1.44 billion.

Despite the overall undersubscription, investor interest was most pronounced in the 91-day Treasury bill, which attracted the highest number of subscriptions.

The Treasury accepted bids amounting to GHS 2.90 billion for the 91-day bill, compared to GHS 698 million for the 182-day bill and GHS 261 million for the 364-day bill. This preference for shorter-term instruments suggests that investors are seeking to minimize their exposure to longer-term risks, reflecting uncertainty about the economic outlook.

The yields on these T-bills also provide insight into investor sentiment. The yield on the 91-day bill held steady at 24.78%, indicating consistent demand for this short-term instrument. In contrast, the yield on the 182-day bill declined marginally by 0.03%, settling at 26.71%, suggesting slightly lower demand. The 364-day bill saw a slight increase in yield, rising by 0.02% to 27.80%, indicating that investors require a higher return to compensate for the longer-term risk.

Government’s Continuous Reliance on Short-term Debt Instruments to Manage Liquidity

The government’s continued reliance on short-term debt instruments to manage liquidity needs underscores the importance of maintaining investor confidence. In the upcoming T-bill auction, the government aims to raise GHS 4.77 billion through the issuance of 91-day, 182-day, and 364-day bills. This reflects the government’s ongoing efforts to manage short-term liquidity needs and cater to investor demand.

However, the Ms Annor-Sika indicated that the persistent undersubscription of T-bills poses challenges for the government’s fiscal management. According to her, the shortfall in raising the targeted amount may force the government to seek alternative funding sources, such as borrowing from the Central Bank or international markets. “This could lead to higher borrowing costs and increased debt servicing obligations, further straining the government’s fiscal position,” she said.

Ms Annor-Sika thus proposed that to address investor concerns and improve subscription rates, the government may need to implement measures to enhance fiscal discipline and transparency.

“This could include reducing budget deficits, managing debt levels prudently, and providing clear and consistent communication about fiscal policies and economic outlook. By building investor confidence, the government can attract more demand for its debt instruments, reducing the risk of future undersubscriptions.”

Meanwhile, reduced liquidity among primary dealers, regulatory changes, and broader economic uncertainties have contributed to this outcome. To mitigate these challenges, the government must focus on maintaining fiscal discipline, transparency, and effective communication with investors. By doing so, it can enhance investor confidence and ensure adequate funding for its short-term liquidity needs.