Risk perception of Ghana’s securities on the Eurobond market seems to be returning to normalcy as investor confidence takes a new turn, data from the Cbonds – a platform that tracks bonds globally – have shown.
Per the data, Ghana’s sovereign US$ yield to maturity (YTM) index – which tracks all bonds and Eurobonds of a specific country – points to a correction in the risk perception of investors. The index rose from 8.19 percent on September 2, 2021, reaching a peak of 11.83 percent on November 30, 2021; but was worsened by uncertainties regarding the 2022 budget’s approval.
However, the index has been on a steady decline since the start of December 2021, reaching 10.58 percent as of December 8, 2021.
Commenting on this, Senior Economist with Databank – the assets management company, Courage Kingsley Martey, indicated that the current decline in the yields supports the longstanding view that the market had over-priced Ghana’s fiscal risks. So, the uncertainty premiums priced into the yields may also be reducing
“We see this decline in the yields as a necessary correction, supporting our view that the market had over-priced Ghana’s fiscal risks. Ghana’s sovereign bonds should not be trading at the distress levels they were and still are. But it now seems investors have seen that the risk perceptions may have been exaggerated,” Mr. Martey said.
He explained that the decline “could also be partly due to indications of some headway with approval of the 2022 budget, as government seems to now be engaging to finalize a budget for the coming year. So, the uncertainty premiums priced into the yields may also be reducing”.
The country’s sovereign bond spreads widened markedly since September 2021 as investor sentiments shifted based on fiscal and debt sustainability concerns, prompting some selloffs by investors with spillovers on the domestic foreign exchange market.
Stating his views to B&FT in an interview, Senior Investment Analyst at OctaneDC Limited, Kwadwo Acheampong said: “Obviously, this portends well for Ghana – lower yields will reflect less risk perception, higher prices and more interest.
“We need a bit more time to know how this reflects the confidence (or restored confidence) investors have in our securities. The real test will be when/if government decides to go to the Eurobond market early next year,” Mr. Acheampong explained.
Long-term bond yields have increased amid growing concerns with rising inflation trends across several advanced economies, leading to tightened financing conditions in Emerging Markets and Developing Economies (EMDEs) to some extent. Largely, this reflects the rise in policy rates to contain rising inflation, rising long-term bond yields in Advanced Economies (AEs), strengthening of the US$ and widening sovereign spreads in some vulnerable frontier economies.
Noting the impact of current high yields on government financing options, Mr. Martey noted that at the current levels it doesn’t mean much to government’s financing options, because yields are still too elevated for a viable issuance – given the prevailing debt sustainability concerns.
“Yields in the 9 to 10 percent area are not good options, and also negative for debt service within the context of current challenges. For a potential issuance, we’d still require some more downward correction to happen. But a lot depends on implementation of the 2022 budget and whether or not government is able to realize revenue targets as programmed in the budget,” he explained.
In recent times, capital flows to EMDEs have become volatile due to concerns about strength of the global recovery and rising inflationary pressures.
Chairman of Monetary Policy Committee and Governor of the Bank of Ghana, Dr. Ernest Addison, expressed fear that current global developments – the recovery in global growth conditions, rising global inflation trends and volatility in capital flows – are likely to have spill-over effects on the Ghanaian economy, mainly through their potential impacts on trade, portfolio flows, external financing and exchange rate movements.
