The Chief Executive Officer of the Standard Chartered Bank, Kweku Bedu Addo, has called on government to consider pushing the limit on Treasury bond issues to beyond the current 5-year fixed note in order to create room for other products to be developed in the economy.
This, he explained, will provide the incentive to develop the country’s mortgage market and keep up investor interest in the economy.
“I think that creating a 5-year note is very good for the market. We should even look at creating 7-year, 10-year or 15-year notes to extend the yield curve.
“On the back of that, you can see a real mortgage market take-off. There’s pricing for long-term money,” he told journalists in Accra on Friday.
Last week, government through the Bank of Ghana auctioned a five-year bond at an interest rate of 14.25 percent, in order to raise GH¢300million for financing four major on-going road projects in Accra and Kumasi.
The last five-year bond that was issued in June 2007 yielded 13.67% while another -- a maiden issue in 2006 that is due to mature in December -- yields 14.47%.
Mr. Bedu Addo is convinced that the latest pricing on the government bond is what the economy needs to sustain its growth and stability. There’s a lot of foreign investor interest in Ghana’s market because of the yield, and a lot of dollars have come into the system because of that interest.
“If our medium-term loan rates start to come down as well -- as much as the short-term loan rates have come down -- the investors will reverse those flows out of Ghana and the currency will move along with it,” he added.
Announcement of the government’s bond auction reportedly pushed dollar inflows and heightened investor interest as foreign investors pitched camp for the sale. As a result, the cedi has been firm in the weeks after the bond sale was announced.
Foreign investors already hold more than one-quarter of outstanding government securities -- up from one-tenth in less than two years.
Slowing consumer inflation and a stable currency have supported a threesome of three-year bonds issued since the year began. In June, year-on-year growth in consumer prices fell to 8.6%, from 8.9% in May and 9% in April.
Inflation had risen to 9.1% in the first quarter of the year following a surge in pump prices, but has been tamed subsequently by falling food inflation which slowed further to 2.8% last month.
With the outlook for inflation stable, especially as the economy enters the harvest season when historically inflation slows, most analysts expect the yield on future bonds to be lower.
The drop in the Central Bank’s benchmark interest rate by 50 basis points to 12.5% last month gave an early indication of money market easing, which should support analysts’ forecasts.
Mr. Bedu Addo is however wary of the drop in interest rates, especially the medium-term rates which he says must stay up a bit even as the short-term rates decline.
He said any move to bring the medium- to long-term rates on par with short-term loan rates will see investor interest in the economy wane.
He explained: “It is a very delicate balance we have to be mindful of. I think what we are seeing is that the short-term rate is coming down, which is around 10 percent for the 91-day Treasury bill. So the short-term is coming down, which is more relevant for us here at the moment in terms of pricing of our assets and everything.
“So, for about much of last year and a bit of this year, we had a very flat yield curve wherein there wasn’t much difference between the short-term and medium-term. Now we are seeing the short-term go down -- it’s gone down to about 10 per cent now -- and if we are seeing the medium-term go up a bit, I think that is about right. That is about how our yield curve should be.
“Over time, it will create opportunities for other products to come into the market; because now if you have a 5-year benchmark, very soon, corporate institutions can issue bonds.
“If we have seven-year and 10-year notes, all those are good developments for the economy so we should look at it that way: but we should also be mindful that the movements there also have an impact on our exchange rate, so it is a very fragile stability that we ought to be mindful of.”
source: Business and Financial Times
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