As Ghana prepares for its December elections, the political atmosphere has increasingly become charged, as investors raise concerns across various sectors of the economy, including the financial markets.
Mr. Isaac Kwasi Mensah, a Financial Analyst and Portfolio Manager at SIC Financial Services Limited, in an interview with the Vaultz News stated that one of the most immediate areas feeling the effects of political uncertainty is the short-term treasury bill (T-bill) market.
“Investors are displaying caution, reflecting the risks associated with the outcome of the elections, and this has already led to notable impacts on T-bill auctions, interest rates, and market performance.”
Mr. Isaac Kwasi Mensah
The December elections In Ghana are set to be highly contested, with parties focusing on key economic policies that have already created divisions among voters and stakeholders. Political campaigns are fueling uncertainty over potential conflicts, particularly as the recent days have witnessed series of debates.
Given this, Mr Kwasi Mensah noted that changes in fiscal policies, public debt management, and monetary stability, are factors that investors consider when making short-term financial commitments.
“Historically, election periods in Ghana have always seen heightened uncertainty, as new governments may introduce changes to tax regimes, public expenditure, and foreign investment policies.
“For institutional and retail investors, especially those who typically participate in the T-bill market, such instability prompts a reassessment of their investment strategies. The treasury bill market, often regarded as a safe haven for short-term investments, is now facing headwinds due to a decline in investor confidence.”
Mr. Isaac Kwasi Mensah
Recent T-Bill Auction Trends
This apprehension was reflected in the latest T-bill auction results. After a brief period of oversubscription the previous week, the government fell short of its auction target, reverting to the trend of undersubscription. The analyst thus explained saying that “the shortfall highlights the growing hesitancy among investors to tie their capital to government securities, particularly as the election date approaches.”
In the previous week’s auction, the government managed to secure a marginal oversubscription of T-bills, a result that many saw as a temporary reprieve. However, the undersubscription in the following week underscored a more persistent concern.
Mr Kwasi Mensah highlighted that investors appear wary of the potential shifts in fiscal policy post-elections and the impact this could have on government revenues and its ability to service short-term debt obligations. “Consequently, they are pulling back or demanding higher returns to compensate for the perceived risk”.
The Surge In Interest Rates
According to the analyst, another significant development in the market is the rising interest rates for T-bills. As the government seeks to meet its financing needs, it has been forced to offer more attractive rates to lure investors back into the market.
“The increase in interest rates, while beneficial to investors in the short term, could have long-term consequences for the government’s fiscal health. Higher rates on T-bills translate into increased borrowing costs for the government, which already faces considerable debt challenges.
“Should this trend continue, the government may find itself in a difficult position, balancing the need to service its debt with maintaining essential public expenditures. Moreover, rising interest rates could exacerbate inflationary pressures, adding further strain to an economy already grappling with the global economic downturn and domestic challenges.”
Mr. Isaac Kwasi Mensah
Election Risks and the Outlook for the Market
Mr Kwasi Mensah asserted that one of the key risks posed by the December elections is the uncertainty over how the winning party will address Ghana’s fiscal challenges.
“The country’s debt burden has been a subject of debate, with various political parties proposing different approaches to managing public finances. The possibility of fiscal tightening, tax hikes, or changes to foreign exchange controls has left investors cautious.”
Mr. Isaac Kwasi Mensah
Mr Kwasi Mensah stated that for the short-term treasury bill market, these risks translate into a volatile outlook. He opined that investors are likely to remain conservative in their participation until there is greater clarity on the post-election economic environment. “This cautious approach could continue to impact government financing, with repeated undersubscription of T-bill auctions and rising interest rates,” he stated.
Furthermore, the analyst warned that foreign investors, who play a crucial role in Ghana’s bond and T-bill markets, may adopt a wait-and-see attitude, holding back their capital until the political landscape stabilizes.
“A reduction in foreign participation could place additional pressure on the local financial market and limit the government’s ability to access critical funds.”
Mr. Isaac Kwasi Mensah
Mitigating the Impact of Political Risk
In light of these challenges, Mr Kwasi Mensah noted that there are steps that both the government and investors can take to mitigate the impact of political risk on the T-bill market.
For the government, he said maintaining a clear and consistent communication strategy regarding its debt management policies can help reduce uncertainty. “Providing reassurances about fiscal discipline and the continuity of economic reforms, regardless of the election outcome, could help restore investor confidence”.
Investors, on the other hand, the analyst said can explore diversification strategies to spread their risk across different asset classes and investment horizons.
“While T-bills remain a relatively low-risk option compared to equities or long-term bonds, diversifying into other short-term financial instruments or foreign assets may help cushion potential losses from political volatility.”
Mr. Isaac Kwasi Mensah
Meanwhile, according to the Bank of Ghana auction results, the Treasury failed to meet its target by GH¢1.486 billion.
The government got GH¢5.881 billion from the sale of the short-term instrument, as against a target of GH¢4.394 billion, a 25.7% undersubscription.
The 91-day bill received the bulk of the bids of GH¢3.788 billion, about 85.97% of the total bids. About GH¢441.43 million of the bids came from the 182-day bill, while GH¢175.04 million were made up of the 364-day bills.
Meanwhile, interest rates rose across the yield curve. The yield on the 91-day bill was up by 11 basis points to 25.01%. The rate on the 182-day bill increased by 3.0 basis points to 26.81%, whereas that of the 364-day bill also inched up to 28.07% from the previous week’s 27.91%.
As the December elections draw closer, Ghana’s treasury bill market is grappling with increased political risk. The recent undersubscription in T-bill auctions and rising interest rates reflect the cautious approach investors are taking in the face of electoral uncertainty.
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