Investor confidence up after IMF engagement

Investors signal their strongest confidence yet following the announcement of Ghana’s engagement with the International Monetary Fund (IMF).

Data from BondEvalue has revealed that yields to maturity (YTM) on the country’s Eurobond showed a sharp decline from 21.31 percent as of July 1, 2022, to 18.30 percent in the early hours of July 6, 2022.

This stance by foreign investors is further expected to gain firm footing as the government and the IMF begin the official discussions, which will present much clarity on the deal. Spreads of Ghana’s sovereign bonds and loss of investor confidence in the economy from rating downgrades have had a big impact on the country’s borrowing costs.

The finance ministry in a statement issued on Tuesday revealed a proposal that seeks to engage the IMF under an Enhanced Domestic Programme (EDP) – a 3-year fast-tracked macroeconomic stabilization programme that seeks to restore investor confidence and achieve fiscal and debt sustainability.

Commenting on the official announcements to seek IMF assistance, Senior Economist with Databank, Courage Kingsley Martey, expressed optimism that in the coming weeks, the market expects the positive news effect to trigger a price rally across Ghana’s Eurobonds and domestic bonds, resulting in some decline in yields across the USD and GHS yield curves.

“We also expect the positive news effect to filter into the FX market to provide some easing of the depreciation pressure. Specifically, we expect to see a moderation in the heightened uncertainty which has driven speculative demand for the USD in recent months. The Ghana cedi should therefore find some respite as investors await the outcome of the negotiations.

But it is important to stress that the supply-side concerns would persist until we get the parliamentary approval of the US$1 billion and possibly, the annual cocoa loan syndication,” Mr. Martey added.

With the 3-year Enhanced Domestic Programme, the government expects improved credibility of its policy and to restore investor confidence in the economy, thereby, regaining market access, boosting development partners (DP) disbursements, and unlocking other financing sources.

“This credibility in itself should provide a supportive environment for policy effectiveness and also unlock the needed external funding from various sources,” the Senior Economist noted.

However, the government would be confronted with the option of implementing more aggressive austerity measures, especially on the spending side, or risk program failure.

“The spending controls is something the government appeared to have struggled with because of competing interests and pressures. The IMF oversight should help revive the enforcement of public financial management laws, and audit the public sector payroll with needed reforms, where necessary,” he stated.

On the revenue side, the market expects to see a renewed commitment to passing the revised tax exemption bill, deployment of the Fiscal Electronic Devices (FEDs) to support VAT collection, and enhancement of the property tax system, which is a more progressive tax regime.

The fiscal and debt challenges have been the primary reason for the downgrading of the country’s credit rating and the surge in Ghana’s Eurobond yields. Standard & Poor’s credit rating for Ghana stands at B- with a stable outlook. Moody’s credit rating for Ghana was last set at Caa1 with a stable outlook. Fitch’s credit rating for Ghana was last reported at B- with a negative outlook.

Credit rating serves as a reference point for sovereign wealth funds, pension funds, and other investors to gauge the credit worthiness of Ghana, thus, having a big impact on the country’s borrowing costs.