Ghana’s financial landscape has been witnessing a significant uptick in Treasury Bill (T-Bill) yields in recent months, with rates reaching remarkable levels. This development has raised both concerns and opportunities for investors, policymakers, and the general public.
GCB Capital in its latest forecast, said it reckons that nominal interest rates are near their peak levels, with recent T-bill auctions recording lower increases in the average weighted clearing rates and the spreads tightening sharply from the range of bids received at the auction last week.
From the peak of around 35.5% pre-DDEP, T-bill yields declined sharply over the three auctions that followed, with the Benchmark 91-day settling at 18.52% at auction 1842 held on 17 March 2023.
However, amidst the heightened inflation risks, which resulted in pronounced negative real return, the apparent macroeconomic risks and the increased appetite for short-term funds due to limited funding options for the government reversed the sharp decline in yields thereafter.
However, with headline inflation which is down 16% YTD to 38.1% in Sept-23 amidst an improving outlook, we believe nominal yields are near their peak.
“We expect the disinflationary trend to continue (GCL’s end-2023 inflation forecast: 30%±1%), and we tip the Nov-23 print to come in 33%, barring any significant passthrough from Cedi depreciation to inflation,” GCB Capital said.
Thus, real returns on T-bills could improve sufficiently, potentially limiting the upside risks to nominal yields. GCB Capital, however, envisages T-bill yields to peak around 30% to 33.5% for the 91-day to 364-day bills.
While the Treasury’s primary market activity will remain concentrated around the front end of the LCY curve as the domestic bonds market remains shut amidst the attractive T-bill yields, GCB Capital expects nominal yields to ease once inflation declines sufficiently.
When sustained, the ongoing fiscal adjustments towards restoring fiscal and debt sustainability and macroeconomic stability will further support disinflation and quicken the decline in nominal yields.
Contributing Factors to the Surge In T-Bill Yields
The surge in T-Bill yields in Ghana can be attributed to several key factors. High inflation rates in the country have driven investors to demand higher returns on their investments to compensate for the eroding value of money. Inflation erodes the real return on T-Bills, prompting the government to offer higher yields to attract investors.
Moreover, Ghana has been grappling with fiscal deficits, which have led to increased government borrowing. The need to finance these deficits has driven up the demand for T-Bills, pushing yields higher.
The country’s central bank, the Bank of Ghana, in recent times has implemented a tight monetary policy to curb inflation and stabilize the currency. This has resulted in higher policy rates, influencing T-Bill yields.
In the intervening time, the depreciation of the Ghanaian cedi has made T-Bills more attractive to foreign investors looking for higher yields and currency protection.
Impact on the Economy
The surge in T-Bill yields can have both positive and negative effects on Ghana’s economy. Higher T-Bill yields can attract both local and foreign investors seeking better returns on their investments.
The government can use the increased revenue from T-Bill issuance to finance infrastructure projects and reduce budget deficits. However, the downside is that it crowds out private sector. High T-Bill yields can divert funds away from the private sector, which may struggle to access affordable credit for business expansion.
The government will face higher debt servicing costs due to the increased yields, which can put pressure on the national budget.
Meanwhile, it’s difficult to predict how long T-Bill yields will remain at such elevated levels. The Bank of Ghana and the government need to strike a balance between offering attractive returns to investors and ensuring the sustainability of the economy.
Investors should carefully consider their investment decisions, taking into account the risk associated with high yields and potential changes in economic conditions. This is because if the government is unable to meet its debt obligation, it will be forced to resort to haircut.
The surge In T-Bill yields in Ghana, peaking between 30% and 33.5%, is a reflection of the country’s economic challenges, including inflation, fiscal deficits, and exchange rate volatility. While it offers opportunities for investors, it also poses risks to the economy. Ghana’s policymakers and investors must carefully navigate this financial landscape to ensure a stable and prosperous future.
