Fiscal consolidation commitment keeps investors in financial market

Databank Research, Courage Martey,

The stance of investors on the financial market remains unrattled, as government, through the mid-year budget review, has assured of commitment to return to fiscal consolidation. Investors in their anticipation, priced a worse case scenario of the economy. However, the outturn for the half year of 2021 points to favorable fiscal position amidst the third wave of the coronavirus pandemic.

Provisional fiscal data from the 2021 mid-year fiscal policy review revealed government’s commitment to fiscal consolidation, as data for January to June 2021 indicates an overall fiscal deficit of GH¢22.32 billion, equivalent to 5.1 percent of GDP, against a programmed target of GH¢22.73 billion, 5.2mpercent of GDP.

Senior Analyst with Databank Research, Courage Kingsley Martey said in an interview with B&FT that, this is an indication of investors preferring to remain over-weight on Ghana Government Bonds (GHGBs), since the pre-budget position of the market already priced-in a worse fiscal outcome.

“Investors have not been rattled by the mid- year budget review, as we have not seen any adverse trading or reaction to the mid-year budget review. In fact, it appears the general expectation was a worse-case scenario where fiscal outcome for the first half of the year would be an adverse outcome,” Martey said.

He added: “We have seen some major investors preferring to remain over-weight on Ghana Government Bonds (GHGBs) since the pre-budget position of the market already priced-in a worse fiscal outcome, which did not exactly materialize from the review presented.”

Chief Executive Officer of Republic Investment, Madeline Nettey, also shared the same viewpoint in an interview with B&FT, saying, generally, there has not been much change pre and post of the reading of the mid-year budget, given that the budget did not request for additional spending.

“I want to believe partly that this budget does not request for additional spending. More so, we have seen that inflation trending around the same metrics. So, that by itself has not also pushed any reaction in any direction, either upwards or downwards.

“Most often, investors react immediately to changes in the monetary policy rate. However, we do not anticipate any changes to the MPR given the position and outlook of headline inflation. This is expected to keep the market from any major changes, all things being equal,” she said.

Although government has increased the primary deficit target from 1.3 percent in the initial budget to 2 percent in the revised budget, the financing or borrowing requirements remain lately unchanged from the initial plans.

Commenting on this Mr. Martey said: “this tells you that the government is signaling commitment to fiscal consolidation despite the risk of revenue shortfalls. Essentially, the fiscal framework was recalibrated such that expected savings on interest payments would be moved to finance non-interest spending in order to leave the borrowing requirements unchanged.”

Minister for Finance, Ken Ofori Atta, in his presentation to Parliament, said government remains fully committed to achieving the fiscal deficit target of 9.5 percent of gross domestic product (GDP) for this year, aimed at returning to the Fiscal Responsibility Act (FRA) thresholds, by 2024.

During the period, the government embarked on a frontloading of it financing need, signaling a much lesser need for financing in the second half of the year.

“The market has rightly seen this signal and so trading has continued without any major shake up from the budget. Although investors still believe that there is a risk of a slight budget overrun arising from revenue shortfalls, they also expect government to rationalise expenditure in the second half of the year to partly mitigate any revenue shortfall,” Mr. Martey said.

The public debt stock, as a percentage of GDP, increased from 76.1 percent at the end of December 2020 to 77.1 percent of GDP at the end of June 2021, inclusive of the financial and energy sector bailouts.

Madeline Nettey, Chief Executive Officer of Republic Investment

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