Continuing growth: Fixed-income market to remain buoyant in 2020

 

Ghana’s fixed-income market has experienced significant growth. As of end-September 2019 domestic fixed-income securities issued on the Ghana Fixed-Income Market (GFIM) totalled GHS104bn ($20.1bn), against GHS102.4bn ($19.8bn) over the same period in 2018, marking growth of 2%. Comparatively, the equity market experienced a year-to-date decline of 5.8%, to a market capitalisation of GHS57.6bn ($11.2bn).

Sovereign Debt

Domestic debt issuances by the government dominate the fixed-income market, with a total outstanding value of GHS77.4bn ($15bn) as of the third quarter of 2019. Government issuances accounted for 35% of total debt securities issued on the GFIM in the first nine months of 2019, compared to 29% over that period in 2018. Secondary trading has been robust, with the monthly trading volume rising by 25% to GHS4bn ($77.4m). In August 2019 the government executed its strategy to further extend the domestic yield curve by debuting a 20-year bond. This extended the yield curve from 15 years – executed in 2017 – to 20 years, and is consistent with the government’s goal of re-profiling its domestic debt portfolio. Increasing the percentage of longer-dated papers relative to shorter-dated ones reduces rollover risks associated with short-term securities. Furthermore, during 2019 the government reopened and tapped several medium- to long-term existing bonds totalling GHS11.8bn ($2.3bn), or 33% of government debt issued in 2019, thereby creating benchmarks and improving liquidity in existing bonds. Evidence of improved local liquidity can be seen in the domestic holding of government bonds, which was up 30% in the year to September 2019 at GHS49.4bn ($9.6bn) year to date. In terms of external debt, the government successfully issued a $3bn eurobond in three tranches in March 2019. The book size at the close of the offer was over $21bn, oversubscribed some seven times, the largest of any African sovereign eurobond.

Quasi-Government Debt

Through its open market operation, the central bank, the Bank of Ghana, sought to absorb excess liquidity in the system in order to manage inflation, issuing a total of some GHS56.1bn ($10.9bn), or 54% of debt issuances, in short-term bills as of September 2019, compared to GHS55.8bn ($10.8bn), or 62% of debt issuances, for the same period in 2018. The Ghana Cocoa Board continued to tap the market through its 182-day cocoa bills, with a total of GHS10.6bn ($2.1bn) issued by the third quarter of 2019, an increase of 62% year-on-year.

Corporate Bonds

Since 2014 the corporate bonds space has witnessed growth in the number of debt issues and issuers, with a total outstanding amount of GHS6.8bn ($1.3bn) as of end-September 2019. With 11 issuers in total, the corporate bonds market share is still the smallest segment of the fixed-income market. The Energy Sector Levy Act (ESLA), the special purpose vehicle mandated to facilitate the refinancing of Ghana’s legacy energy debts, dominated the corporate bond market. ESLA, as part of its liability management, bought back GHS335m ($64.9m) of its bonds in June 2019, and immediately following this issued GHS1bn ($193.7m), 10-year paper under its GHS10bn ($1.9bn) bond programme. Total issuance in corporate bonds (excluding ESLA) dropped 78% year-on-year, largely due to the financial sector clean-up affecting investor confidence, but this drop is expected to correct in 2020 as investor confidence improves.

Forecast

The fixed-income market is likely to continue its buoyancy into 2020. The government’s domestic borrowing will continue to supplement revenue and slightly higher yields across the yield curve are expected. The growing pension industry and other investors will be seeking more fixed-income products in order to diversify portfolios and earn higher returns relative to government bonds as investor confidence improves, albeit cautiously, in 2020. Industry watchers therefore anticipate issuers in the fixed-income market to raise funding through debt instruments that are relatively new to the market, such as infrastructure bonds.