After over six months of providing weekly updates on Nigerian fixed income, today I will begin expanding coverage to include developments across the wider West African sub-region and in particular Ghana and the West African Economic and Monetary Union (WAEMU) franc region which is made up of eight countries (Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo) all of which use the CFA Franc (XOF) as the common currency. Today I will start with an introduction to Ghana and then move to the WAEMU market tomorrow.
The Ghanaian fixed income market has grown in leaps and bounds in recent years but relative to the Nigerian market still has some way to go. Secondary market trading is thin so yield quotations largely reflect issuance yields at weekly primary auctions with most activity at the short end of the yield curve with the 3M and 6M bills accounting for 62% of issuances. However in recent years, rising foreign participation and a move to elongate the debt duration has driven increased activity at the long end of the curve.
Fiscal retrenchment continues…at least on paper: In 2017, the deficit shrank to 5.4% of GDP from 8.9% in 2016. While this sounds nice, note that most of the cutback in stemmed from a reduction in capital expenditures as recurrent spending tracked higher. Sounds familiar to what Nigeria does? For 2018, the posture appears expansionary with the government proposing a 15% rise in fiscal spending to GHS62billion driven by higher public sector wages (up 15%) and capital spending (up 50%). To fund the budget, the Nana Akufo-Addo government assumes a 24% rise in fiscal revenues to GHS51billion driven by higher tax receipts and oil revenues. On the plus side, rising oil production in Ghana (2018e: 146kbpd vs 133kbpd in Q3 2017) which has underpinned strong GDP growth in recent quarters provides ample room for one to be optimistic. But like its Nigerian cousin, the big jump in capital spending looks like the government is saving room to cut back on to meet fiscal containment targets with the IMF should tax revenues miss targets. That said, I think the Government of Ghana (GoG) is likely to make further progress towards more consolidation though whether a target 4.5% deficit is attainable remains to be seen. I think the improved revenue picture thanks to oil gives them ample room to cut it down.
Dovish monetary policy bias: Ghana moved to join the real of net oil exporters in 2017 with an oil trade surplus which helped underpin the appearance of a trade surplus and went a long way in trimming the current account deficit. Alongside strong portfolio flows to GHS assets in 2017, the cedi stabilized and inflationary expectations slowed. Structurally improvements in food production and greater utilization of gas in power production also aided the disinflationary process with the latter now encouraging the GoG to announce a cut in tariffs in 2018. In tandem with the lower inflation (down 510bps to an average of 12.4% in 2017), the Bank of Ghana (BoG) has eased monetary policy with a 550bps cut in the MPR to 20%. In 2018, inflation looks set to decline towards the target range of the BoG (6-10%) which suggests further room for policy rate cuts which I expect will drop to 16.5-17% by year end.
Figure 1: Trends in headline, food and non-food non-farm inflation
Increased FPI appetite for GHS assets: The solid growth picture for Ghana with real GDP growth print of 9% y/y in Q3 2017, positive trade balance and declining inflation picture has attracted FPI interest in GHS assets. Alongside plans to issue between USD1-2billion in Eurobonds and a fiscal containment in 2017 which has lowered financing requirements, domestic issuance looks set to drop by over half (52% as per budget). The confluence of all these factors melds into a subdued interest rate outlook over 2018 with a good dose of yield and spread compression across the GHS yield curve.
The Week that was (February 19 – February 23)
In the prior week, the GoG borrowed GHS529billion in 3M and 6M maturities split in the ratio 89:11. Yields on both tenors have remained roughly unchanged from year end 2017 as the GoG is net issuing at the segment and offshore participation is thin at the segment of the curve. Nonetheless, secondary market yields on longer dated instruments have declined to 15-16% levels (though thin) as foreign participation and prospects of a rate cut in March is driving yield and spread compression.
Figure 2: Cedi yield curve
The Week that ahead (February 26 – March 2)
The GoG is currently on a roadshow to tap global debt markets and successful issuance could create the set of conditions for a collapse in rates in Q2 2018. There is strong foreign interest in Ghana at the moment and in the event the Q2 2018 debt calendar shows a moderation in issuance of short term instruments with a shift towards the deep end of the curve, we could see significant declines in short dated instruments over the period.
Central to the GHS yield curve story over 2018 is the improving macroeconomic story which has attracted foreign interest in Ghana. Higher oil production with the on-streaming of new output which is set to push Ghana’s oil production over 200kpbd amid rising crude oil prices points to improvements in the external balance and GHS stability. The stable GHS picture is a boon to stable prices which provides foundation for easing a policy rate that’s twice the inflation rate. Furthermore fiscal plans to reduce domestic issuance and extend the tenure of government local debt all favour a normalisation of the yield curve. This environment means outlook is for downside in yields over 2018.