Databank: Broadly stable yields expected in Ghana’s fixed income & forex market

Ghana's fiscal performance will play a crucial role in shaping the demand and pricing conditions in the country's fixed income market in the first quarter of 2021, according to insights from DataBank. As the Government of Ghana gears up for its next debt issuance on February 20th, investors are closely monitoring the country's debt servicing needs and the implications of its rising debt stock. Courage Kingsley Martey, Senior Economist at DataBank, shed light on the current economic landscape and provided key insights into what to expect in the fixed income and forex market. Martey highlighted the significant increase in Ghana's public debt portfolio due to contingent liabilities from the financial sector clean-up and the crystallization of energy sector debt. These factors have led to heightened borrowing needs for the government, which will likely resort to open market borrowing to meet its financial obligations. In addition to the projected budget deficit of 18.9 billion cities for the year, investors are closely watching the market for the kind of yields that can compensate for the associated risks. One key point emphasized is the impact of currency movements on bond yields. Martey noted that the performance of the currency has a direct correlation with bond yields, with bond yields currently hovering around 20% following a strong start to the year for the currency. Investors are expected to seek yields around this level to hedge against FX risks and other uncertainties in the market. Looking ahead to the upcoming debt issuance on February 20th, Martey expressed confidence in the market's liquidity and foreign investor participation. The successful January transaction, which saw foreign investors contribute significantly to the demand, is a positive indicator for the upcoming issuance. Martey projected yields to range between 19% and the lower 20% level, reflecting a more stable market compared to previous months. Martey also shared insights on the outlook for the Ghanaian currency in the first quarter, citing confidence in portfolio investment inflows and the central bank's FX forward auctions as key factors supporting the stability of the city. However, he cautioned that political risks in the second half of the year could introduce volatility to the foreign exchange market, potentially impacting the currency's stability. Shifting focus to the fixed income market, Martey highlighted strong liquidity levels and the central bank's policy rate of 16%. The decision to maintain the policy rate is aimed at sustaining the appeal of local currency denominated bonds and fixed income securities, driving increased trading volumes in the market. Liquidity remains robust, with trading volumes more than doubling since the beginning of the year, signaling investor confidence in the market's stability. In conclusion, Martey's insights offer a comprehensive overview of Ghana's fixed income and forex market, painting a picture of cautious optimism for the near term. While challenges lie ahead, including political uncertainties that could impact market dynamics, the current outlook remains positive with strong demand, liquidity, and relatively stable yields expected in the coming months.