Oversubscribed 6-yr bond shows investors’ optimism over inflation – Analyst

Gov’t revenue target still low, can be better – IEA

The recent government 6-year bond that was oversubscribed is indicative of investors’ positive outlook on inflation, which the Bank of Ghana has targetted at 8±2 percent at the end of the year, Senior Investment Analyst at OctaneDC Limited, Kwadwo Acheampong, has said.

Per the latest inflation figures reported by the Ghana Statistical Service (GSS), inflation went up in August 2021 to 9.7 percent – the highest recorded in five months and closer to the central bank’s upper target band (10 percent).

Prior to this, domestic price pressures moderated during the second quarter of 2021, causing headline inflation to decline significantly from 10.3 percent in March 2021 to 7.5 percent in May 2021 before ticking up to 7.8 percent and 9 percent in June and July 2021 respectively.

Subsequent to announcement of the August 2021 inflation data, government raised about GH¢1.24billion in a 6-year Treasury bond issuance that was oversubscribed.

This, Senior Investment Analyst at OctaneDC Limited, Kwadwo Acheampong said, gives credence to investor confidence on inflation projections.

“The success of the 6-yr bond issue lends credence to investor confidence in inflation projections. The yield (18.6 percent) was enticing enough.

“Judging from the fact that the recent 6-year government issue was oversubscribed, investors seem not to have given up hope yet. At the beginning of the year when inflation was higher, government managed to successfully issue a Eurobond on the international market. There is no cause for concern,” he said in an interview with B&FT.

According to the Bank of Ghana, the July baseline forecasts inflation to remain within the medium-term target band of 8±2 percent in the outlook barring any unforeseen shocks, especially fiscal slippages.  Assessment of risks to the inflation outlook from global economic conditions, domestic economic activity and government’s fiscal policy implementation amid the pandemic suggest that the balance of risks to the inflation outlook is largely subdued.

“Generally, the market still believes that single-digit inflation is achievable this year. Even in cases where some investors believe that inflation could stray above the 10 percent limit, we expect a quick return within the band as the cost pressures normalise over the next 12 months, barring unexpected shocks,” Senior Economist, Courage Kingsley Martey of Databank, said in an interview.

Despite the analysts’ positive outlook, the main issue confronting the central bank is a view that the drivers of inflation are cost-push and structural factors which are not immediately within the reach of monetary policy, unlike demand-side forces.

“This is where we could see inflation straying marginally above the upper target. But given that demand conditions remain weak and wage pressures remain subdued, we do not expect a second-round effect from these cost-push factors. This gives a chance for the BoG to ultimately hold or drag inflation within the band,” Mr. Martey said.

Food and Non-food inflation

In the central bank’s forecast, food and non-food inflation are projected to hover around the central path, driven broadly by low production costs; while imported inflation is expected to exert some upward pressures. Costs in both the food and non-food sectors are projected to be low, reflecting the prevailing spare capacity – the negative output gap – as well as the exchange rate’s projected stability in the outlook. However, production costs are projected to rise in the medium-term as economic activity fully recovers.

The key upside risks to the inflation outlook include the projected uptick in food prices, rising ex-pump prices of petroleum products, and possible fiscal pressures.

Nonetheless, economic activity is expected to approach full capacity in the medium-term, driven by higher impulses from global demand and improvement in expectations of economic agents as the economy better-adapts to the COVID-19 pandemic.

Growth Prospects

This month, two credit rating agencies – Moody’s Investor Services and Standard and Poor’s – affirmed Ghana’s Credit Rating at B3 and B- respectively, while maintaining Ghana’s economic outlook.

Both credit rating agencies (Moody’s and S & P) acknowledge that Ghana’s economy is recovering from effects of the pandemic faster than its peers. Hence, government should focus more on growth and implementation of the Ghana CARES Programme.

Per the latest data from the Ghana Statistical Service (GSS), Ghana’s economy grew 3.9 percent in the second quarter of 2021 – representing an improvement on the 3.1 percent growth recorded for the first quarter of the year, proving that the country is experiencing a strong economic rebound on the heels of suffering a COVID-19-induced economic recession during the second and third quarters of 2020.

The credit rating agencies considered Ghana’s improving growth prospects, resilient external sector performance, and continued access to the capital markets [domestic and international] as essential factors in maintaining the rating and outlook.

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