Large domestic institutional investors including banks, pension funds, insurance companies and investment banks continue to increase their holdings on the local debt market, data from the Central Securities Depository (CSD) have shown. The available data suggest a reduction in the holdings of foreign investors in the domestic debt market.
This move, though cementing the domestic investors’ capacity to help support the government to finance its budget and stem depreciation of the local currency, also poses a significant risk to economic growth because of reduced capital for lending to the private sector – thus pushing up the cost of borrowing.
As of December 2021, the data indicate, local investors held about 82.57 percent of the outstanding domestic debt stock, equivalent to about GH¢150.02billion – which is a combination of both government and corporate debts.
Non-resident investors held 17.43 percent of the outstanding debt stock. This is a significant decline as compared to 38.44 percent and 30.01 percent in 2017 and 2018 respectively.
Reacting to the dwindling participation of foreign investors, Senior Investment Analyst at OctaneDC Limited, Kwadwo Acheampong, said in an interview with B&FT that this should accordingly ensure a reduction in the depreciation risk exposure of the nation’s debt, given that the local currency over the years has often suffered decline; in part, due to activities of non-resident investors.
The local currency recorded a 4 percent depreciation against the US dollar at the end of 2021, despite an earlier appreciation during the year. Accordingly, the Bank of Ghana has indicated it will pump US$450million into the forex market during the first quarter in a bid to stabilize the local currency against the US dollar.
Mr. Acheampong suggested that, perhaps, the proportion of non-resident investors may be a good indicator of the appetite of foreign investors for the country’s government debt instruments. “Maybe, just maybe. I am not sure this is the case,” he stated.
With regard to pressure on interest rates, the Senior Investment Analyst was keen to highlight that the quantum of domestic debt, more than the residency of investors, should be of greater concern.
According to the 2022 budget, financing of the fiscal deficit of about GH¢37.0 billion – equivalent to 7.4 percent of GDP – from domestic sources including net issuances from debt will amount to GH¢27.92billion, equivalent to 5.6 percent of GDP. However, the government expects to reduce domestic borrowing needs by deploying exceptional financing, through the use of newly allocated Special Drawing Rights (SDRs) by the International Monetary Fund (IMF).
Mr. Acheampong suggested that the probable implications of the current trend are lowered depreciation pressure on the local currency as well as better control of domestic debt servicing. “With consistent high growth and prudent revenue generation measures, government revenues could correspondingly grow to reduce the need for borrowing,” he said.
Subsequent to the reduction of non-resident investor participation in the debt market is tighter market liquidity to some degree, resulting in an increase in yields on domestic debts.
Accordingly, this ultimately reduces the pool of funds available for the Treasury to borrow and meet its funding needs.
Stating his views on declining non-resident investor participation, Senior Economist with Databank Courage Kingsley Martey stated that the trend could impact the Treasury’s debt service burden especially when the borrowing requirements are very high.
Effectively, Mr. Martey said that stronger participation from non-resident investors would have “boosted the market liquidity and helped support the Treasury’s financing needs.
“In the long run, reducing the Treasury’s borrowing requirements while taking steps to deepen the domestic capital market is the way to go,” he stated.
Primarily, irrespective of the investor’s domicile, the more government borrows on the domestic market, the bigger the threat it poses to local businesses; thus, there’s a possible increase in the cost of borrowing.