Persisting doubts hamper robustness in the secondary market's liquidity reserves
The vibrant Ghana Fixed Income Market (GFIM) is currently experiencing a sluggish phase due to the cloud of uncertainty hanging over the Domestic Debt Exchange Programme (DDEP). This program, which kicked off in December last year, aims to restructure about 11 billion US dollars' worth of domestic bonds, crucially for Ghana to reach its debt sustainability threshold of 55% debt-to-GDP ratio[3].
The government has put a stop to the DDEP, but there's a lingering question mark on whether the 80% participation target from individual investors will be achieved. Meeting this threshold is crucial for a final agreement with the International Monetary Fund (IMF)[1]. As a result, market data show a 12% decline week-on-week in trading volumes, reaching 932 million Ghanaian cedis[1].
In January 2023, the fixed-income market's total volume traded plummeted to 10.09 billion Ghanaian cedis, valued at 8.83 billion cedis—a 39.86% drop compared to the 16.68 billion volumes traded in January 2022, worth 16.84 billion cedis[1].
Apakan Securities, a market observer, reports that the 3-year and the 6-year bonds were the most actively traded. The Jan-2025 bond, offering a whopping 21% coupon rate, witnessed brisk trading, reaching a clearance of 55%, while the October-2024 bond, also with a 21% coupon rate, was priced at 53%[1].
Last week, GoG bonds, notes, and bills worth 2.25 billion cedis were traded, representing a 16.56% increase compared to the previous week's 1.93 billion cedis[1]. The corporate bond market also saw action, with 113.73 million cedis in volume traded[1].
Fincap Securities, another market observer, notes that the front-end of the yield curve witnessed active bids as a few risk-tolerant investors continued to show an appetite for short-dated papers[2]. "The front-end of the curve was relatively actively bid as few risk-tolerant investors maintained an appetite for the short-dated papers. Treasury-bills recorded the most patronage for the fifth week running, accounting for 62.09% of the market share. The tail-end and midsection of the investment spectrum-remained dormant over the week," Fincap Securities stated[2].
Fincap Securities also highlighted that Treasury-bills retain their status as the go-to government debt instrument for the majority of financial market players, thanks to their exclusion from the DDEP[2].
In December 2022, the government invited bondholders to exchange their holdings for new bonds with terms compatible with its desired debt trajectory[4]. However, concerns about the nature of the debt operation from bondholders forced the government to revise the DDEP's framework.
The updated DDEP memorandum categorizes eligible bondholders into three groups:
- Category A includes all investment schemes (such as mutual funds or unit trusts) and individual bondholders under the age of 59. These investors can now hold two bonds maturing in 2027 and 2028, with the principal balance split evenly between the two and an annual interest rate of 10%[4].
- Category B consists of individual bondholders aged 59 or older, who are eligible for the same terms as Category A but with an increased annual interest rate of 15%[4].
- General Category bondholders, who aren't in either Category A or B, will still swap their old bonds for new ones, but the interest payment structure has slightly changed[4].
On the flip side, the DDEP has created a liquidity crunch in the banking sector. With restructured bonds yielding lower income and longer maturities, banks have less cash on hand, curtailing their capacity to extend credit, particularly to small and medium-sized enterprises[3].
The DDEP has also strained banks’ capital buffers, whittling down their capital adequacy ratios[3]. The combined effect of these challenges has led to a reduction in credit Available to the private sector, disproportionately affecting small businesses that rely heavily on bank financing for their operations and growth[3].
Finally, the DDEP and ensuing negotiations have injected volatility and uncertainty into the fixed income market. Although the restructuring has improved Ghana’s debt sustainability in the long term, market confidence remains shaky as everyone navigates the new landscape[3]. The Bank of Ghana and financial institutions are adopting strategies like the S.T.A.R. approach (Synergy, Technology, Analytical Precision, and Risk Mitigation) to fortify and revitalize the banking sector amid the challenges[3]. In simple terms, the revised DDEP has extended the maturities and lowered the coupon rates for domestic bonds, creating liquidity and capital adequacy issues in the banking sector, resulting in a contraction of credit availability. These factors have dampened market activity and confidence in the GFIM, with ongoing endeavors to restore equilibrium and growth.
- The sluggish phase in the Ghana Fixed Income Market (GFIM) is linked to the uncertainty surrounding the Domestic Debt Exchange Programme (DDEP), which aims to restructure domestic bonds worth approximately 11 billion US dollars and achieve debt sustainability.
- The DDEP has led to a decreased participation from individual investors, which is crucial for reaching an agreement with the International Monetary Fund (IMF). Week-on-week trading volumes have dropped by 12%, reaching 932 million Ghanaian cedis.
- The trade volume in the fixed-income market has significantly declined in January 2023, with a 39.86% drop compared to the same month in 2022, and the 3-year and 6-year bonds being the most actively traded.
- The revisions made to the DDEP have created a liquidity crunch in the banking sector, reducing credit availability, particularly for small and medium-sized enterprises (SMEs), and straining banks’ capital adequacy ratios. This, in turn, has dampened market activity and confidence in the GFIM, with ongoing efforts to restore equilibrium and growth.
