Financial Analyst and Banking Consultant, Dr. Richmond Atuahene has revealed that beneath the recent high demand for the government‘s treasury bills lies a dangerous risk that needs to be addressed.
The Government of Ghana in recent weeks has been enjoying a very high demand for its short-term market instruments.
Week in and week out, individuals, banks, corporate institutions, and other investors are demanding more of the bills. The excess demand beyond the planned target has been forcing the government to even reject some bills. For instance, two weeks ago, the bills were highly oversubscribed forcing the government to return nearly GH¢ 3 billion after meeting its target.
The case wasn’t different last week as the short-term bills were again oversubscribed by 117%. Although the government planned to borrow GH¢ 8.1 billion, it received a total bid worth GH¢ 17.7 billion. The government ended up borrowing GH¢ 9.4 billion while about GH¢ 8.3 billion bids were rejected.
It is noteworthy that despite the drop in the interest rate on the bills in the past weeks, investors continue to scramble for the short-term instrument.
Fixed Income and Currency Trader, Kodzo Letsa confirms that the recent auction witnessed the yields, “plummeted across the curve, with week-on-week drops of 113 bps, 88 bps, and a dramatic 130 bps for the 91-day, 182-day, and 364-day bills, respectively.”
Why the Scramble for Treasury Bills?
On the face value, the high demand for the bills is often interpreted as soaring investor confidence in the government instruments. While this may be true, there are other factors accounting for the trend.
Dr Atuahene explains to The High Street Journal a number of reasons influencing the surge. He points that the absence of the bonds market (long-term instrument market) is playing a very key role in the development. With the default leading to the debt restructuring exercise, the bonds market has virtually become non-existent hence the short-term market has become the only alternative.
Dr. Atuahene further stated that demand for foreign exchange as a means of investment has also declined. With the interest on the T-bills exceeding the inflation rate hence offering real returns, coupled with the perception that T-bills are risk-free, investors, individuals, and institutions with cash had no option but to flock to the short-term market.
“I think the demand for foreign exchange has decreased. People do not have any other viable place to invest hence the decision to buy treasury bills. That is why people are putting in more money. If you look at the loan portfolio, it is going down and down and the treasury bill investment is going up and up what is happening is that people are thinking it is risk-free. That is why they go there. They get a better return which is even higher than inflation, ” he told SKB Journal in an interview.
The Potential Risk
Although the short-term government instrument is often perceived as risk-free, Dr. Atuahene says people with such assertions must revise their notes. He says there is a possibility of a default in repayment of maturing instruments.
Despite the booming demand for treasury bills, the financial analysts warn that excessive government dependence on short-term borrowing is unsustainable which can cause the market to collapse.
He explains that if the government does not effectively manage its budget and scale-up its revenue mobilization, there is a risk of default which could lead to a restructuring of the short-term instrument.
“The consequence is that if the government does not manage its budget and incoming revenue well, a time will come when the treasury bill will collapse,” he revealed.
In addition, the high demand for the government instrument is a huge threat to the private sector. As investors prefer to lend to the government, the private sector is crowded out leaving very little funds available for businesses to grow and expand. This, Dr. Atuahene says is a bad omen for economic growth and expansion.
“All the institutions including the banks are now buying treasury bills. They are not helping economic growth. If you buy a treasury bill and you are not lending to the private sector, the economy does not grow,” he remarked.
Collapsing Treasury Bills Markets – Precedents
Are government treasury bills immune to default or collapse? There are numerous precedents across the world where some governments with stronger economies experienced a collapse of the short-term market leading to a restructuring.
- UK 2022
The United Kingdom Gilt Market Crisis in September 2022 is another evidence that the government treasury can hit a snag. Investors dumped UK bonds, causing yields to spike and pushing pension funds to the brink of collapse due to their exposure to gilts. This forced the Bank of England to step in emergency bond purchases to stabilize the market.Other countries such as Greece and Ukraine have also experienced similar events teaching a lesson that the current over-reliance on the short-term by the government of Ghana is a risky venture. As Dr. Atuahene puts it, “government should know that you can’t depend on the short term market for long-term.”Averting a Possible Crisis – What Government Must Do
To prevent a possible crisis that could emanate from the high dependence on short-term by both the government and investors, a number of recommendations have been given.Dr. Atuahene recommends that the Ministry of Finance must work extra hard to increase revenue mobilization. They will play two key roles. In addition to helping to repay maturing bills, it will also help to government to reduce the reliance on short-term borrowing.
He says government the government should ensure that,” the revenue that we generate will match the treasury bills that we are borrowing.”
In addition, banks must incentivized to lend more to businesses instead of investing predominantly in treasury bills to foster economic growth. The Bank of Ghana’s latest Collateral Registry for the fourth quarter of 2024 reveals the loans disbursed by banks, speciafically, foreign-owned banks have reduced significantly.
The report reveals that the share of secured loans granted by foreign-owned banks declined sharply from 74.6% in Q4 2023 to 51.5% in Q4 2024. This trend, the experts say must be drastically addressed to ensure its reversal.
The current rush for the government’s treasury bills may appear as a sign of investor confidence, however, beneath the surface is a dangerous risk if no drastic measures are taken. If left unchecked, Ghana risks facing a treasury bill crunch similar to what has previously happened in countries such as Russia, the UK, Greece, and others.
- Russia 1998
The government defaulted on its domestic debt forcing a restructuring. It further placed a 90-day moratorium on commercial external debt payments. - United States 2020
The United States treasury market also hit a snag in March 2020. During the early days of the COVID-19 pandemic, a panic by investors caused the most liquid treasury market to tumble. Investors started selling their bills en masse to raise cash causing a crisis.
