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Treasury bill rates hit 5-year low

July 5, 2017, 11:50 a.m.

Rates on short-dated government securities have taken their free fall to another level, hitting a five-year low on June 23, this year.

Buoyed by the current stable inflation and foreign exchange rate regime, rates on the benchmark 91-day treasury bill (T-bill) dropped from 25.19 per cent on July 13, 2015, to 22.79 per cent in January, last year, before narrowing further to 11.93 per cent last Friday.

The same applies to the rate of the 182-day Treasury bill, which fell from 25.88 per cent in July 2015 to 12.89 per cent on June 23.

In their current state, interest charged on the two securities, and by extension short-dated instruments, only rivals the levels last seen in February 2012, when the 91-Day and 182-Day bills were sold at 10.99 per cent and 11.22 per cent respectively.

Since then, the rate has been on the upward trajectory, albeit inconsistently, until October last year when it reversed course to end the year at 16.68 per cent. It then continued with the decline, hitting the current record lows.

Good omen

The decline is the outcome of weakening inflationary and foreign exchange pressures, especially between October 2016 and June this year, which blended well with the government’s new debt management strategy – reduced appetite for short-dated securities – to lower the strain on the risk-free securities.

Although the reduction in the rates is still in its early days, the trend strengthens hopes that a stable interest rate regime is in the offing, much to the benefit of the private sector.

An economist with the Institute for Fiscal Studies (IFS), Mr Leslie Dwight Mensah, told the GRAPHIC BUSINESS that the trend signalled a good omen for the economy and the government in particular.

“It basically means that they (the government) are raising the same cedi for less interest,” he explained.

Firm growth in the amount used to service debt, which is mainly a consequence of high rates on debt instruments, has been one of the three rigidities throwing the budget off target.

In the first quarter of the year, interest payment amounted to GHS3.9 billion, about 12.8 per cent higher than the budget target of GHS3.4 billion for the period.

Mr Mensah said a declining T-bill rate meant that interest payments on short-dated debts could reduce and that might help ease the pressure on the entire debt servicing cost.

Impact on lending rates

With low rates on T-bills being one of the products of reduced appetite for short-dated funds by the government, the current trend means that patrons of these securities, majority of which are banks, could consider increasing lending to the private sector in return for comparatively higher yields.

It also means that the cost of funds to the private sector could fall and that should inspire businesses to borrow more for expansion and investment in new business lines.

The Group Chief Executive Officer of CDH Financial Holdings, Mr Emmanuel Adu-Sarkodee, said in a separate interview that the trend portended a good omen for the equity market, which suffered negative year-to-date returns in 2016 and 2015.

As the declining T-bill rates combine with moderate inflation to strengthen the macroeconomic environment, he said more listed companies would post strong financials and that should impact positively on appetite for equities.

Already, the CDH Balanced Fund, which Mr Adu-Sarkodee chairs, is aiming at shifting its appetite from fixed income securities to equities, where a paltry two per cent of its funds were invested in last year.

Healthy development

While the drop in T-bill rates “is healthy for private sector growth,” the President of the Association of Ghana Industries (AGI), Mr James Asare-Adjei, told the GRAPHIC BUSINESS that much remained to be done to help translate the reductions into fruits for businesses.

“We as private sector operators are looking forward to a corresponding and significant reduction in interest rates but that is not what we are seeing. The question we keep asking ourselves is why is it that key macroeconomic indicators are favourable yet it is not translating into interest rates,” he asked.

The situation showed a disconnect that needed to be addressed, the AGI President said, pointing to the association’s age-old position that the Bank of Ghana should activate, regulate or cap the rate of credit to businesses.

Most banks have long cited bad loans, high cost of operations and lack of long-term funds as the cause of the disconnect between interest rates and a stable economy.