Databank wants stricter debt mgt strategies

Investment banking firm, Databank, is prescribing stricter debt management strategies to avert the country’s debt rising to unsustainable levels.

At the moment, the country’s public debt stock, which is US$21.73 billion, has increased to the sustainability threshold of 60.8 per cent as of September 2014. 

This has led to concerns that further borrowing could raise the country’s debt  to unsustainable level.

But the economic analyst at Databank, Mr Courage Martey, in an interview after post-budget analysis of the 2015 budget, said the planned migration of some commercially viable projects and their associated loans to the management of the Ghana Infrastructure Investment Fund (GIIF) would halt the rising debt levels.

He explained that the fund, modelled on a Public Private Partnership (PPP) would skew investments to high yielding infrastructure instruments in order to deliver higher returns.

This, he said, was possible because of the private sector’s quest for high returns which would ensure that every investment delivers value.

“It is our expectation that the Infrastructure Fund would provide a wider pool of resources from the public and private sectors, easing the financing burden on the public sector,” Mr Martey said.

Ghana currently faces huge infrastructure gap which requires an annual investment of US$1.5 billion to bridge the gap.

“Government’s decision to migrate some commercially viable projects and their associated loans to the management of the GIIF is expected to reduce the government’s debt stock,” he added.

Diversify borrowing to longer-term instruments

The analyst said the planned diversification of borrowing into longer-term instruments and extending the yield curve to 10 years would reduce the upward pressure on short-term yields and consequently reduce debt financing cost.

While the firm is upbeat that the move to lengthen the yield curve is a plausible idea, it does not expect immediate implementation given the high interest rate regime prevailing on the market. 

“In our view, it would be more prudent for the government to delay the implementation until macroeconomic stability is achieved and translated into lower yields.” Mr Martey said.

 Databank also welcomes the initiative to set up a sinking fund for the efficient debt management.

“We expect the US$250 million cap on total transfers to the Ghana stabilisation fund to enable the use of windfalls in financing the Sinking Fund for debt servicing and repayment,” said the economic analyst.

Ghana Stock Exchange 

According to Mr Martey, the plan to list the Government of Ghana’s (GoG) medium-term securities on the Ghana Stock Exchange (GSE) would enhance information flow and price discovery for GoG’s bonds.

“We also expect this strategy to increase investor participation on the capital market, improving liquidity and deepening Ghana’s bond market.”

2015 Budget analysis

Ghana’s 2015 budget statement shows an intention to employ significant austerity measures aimed at achieving a front-loaded adjustment in the fiscal deficit.

Despite the protracted negotiations with the IMF, there are strong indications that the government is committed to implementing IMF’s proposals. 

The GoG’s commitment to reduce the fiscal deficit from the 9.5 per cent projected for 2014 to 6.5 per cent by 2015 is consistent with the front-loaded adjustment set forth by the IMF.

The decision to implement proposals by the IMF should further consolidate the positive medium-term outlook for the Ghanaian economy.

The fiscal measures which are expected to improve revenue mobilisation is also expected to reduce the percentage of tax revenue committed to the payment of wages and salaries to 40.6 per cent by 2015 from the projected figure of 55 per cent.

Interest payment as a percentage of tax revenue is also expected to drop marginally by 200bps to 38 per cent by 2015.

 But Databank interprets the marginal drop in interest expenditure as a reflection of its expectation of interest rate being sticky downwards in 2015. 

Trade Policy Initiatives

One of the main factors undermining Ghana’s trade balance (and current account balance) is the country’s import orientation.

Although the country’s trade deficit reduced from 5.6 per cent of GDP in September last year to 1.8 per cent in September this year, the improvement was due to the impact of a sharp cedi depreciation discouraging imports rather than any growth in export.

This reduction in the trade deficit is unsustainable in the medium to long term unless there is an export-led and value addition strategy to increase the country’s foreign exchange earnings relative to imports.

The trade initiatives proposed in the 2015 budget is therefore seen as a more sustainable approach, albeit a slow-paced one.

 Analysts say the proposal for an Export-Import (EXIM) bank to support export-oriented activities would provide a stronger basis for export finance especially in the area of non-traditional exports.

It is also expected that the increased financial support from the EXIM bank to enable local companies take advantage of opportunities from accessing the European Market to the Economic Partnership Agreement (EPA).