About The US Debt Ceiling

The debt ceiling is a statutory limit on the amount of debt that the United States government can issue to fund its operations and meet its financial obligations. It sets a maximum level of outstanding debt that the government is allowed to have at any given time. The debt ceiling is set by Congress and serves as a mechanism to control government spending and borrowing.

The purpose of the debt ceiling is to ensure that the government does not excessively accumulate debt without the oversight and approval of Congress. It serves as a mechanism for Congress to exercise control over the nation’s borrowing authority and to debate and make decisions on fiscal policy.

When the US Treasury reaches the debt ceiling, it means that it has borrowed up to the maximum limit allowed by law. At that point, the Treasury cannot issue any more debt to meet its obligations, such as paying bills or servicing existing debt. If the debt ceiling is not raised or suspended by Congress, the Treasury must rely on extraordinary measures, such as reallocating funds or suspending certain government payments, to continue financing its operations.

Failure to raise the debt ceiling and take appropriate measures to avoid default could have severe consequences for the US economy and financial markets. It could lead to a loss of confidence in the US government’s ability to meet its obligations, increase borrowing costs, and disrupt the functioning of various sectors, including government services, Social Security payments, military operations, and more.

The debt ceiling has been a subject of political debate and contention in the past, with Congress often engaging in negotiations and discussions on spending priorities, fiscal policies, and deficit reduction measures when considering whether to raise or suspend the limit.

Debt ceiling suspended until 2025

As at the end of May 2023, the US did not raise the limit, but suspended it entirely until 2025.

Potential Impact of the Debt Ceiling on the Ghanaian local currency

The US debt ceiling negotiations primarily impact the US economy and financial markets. However, they can have indirect effects on other countries, including Ghana and its currency, the Ghanaian cedi. Here are a few potential ways in which US debt ceiling negotiations could affect Ghana:

Global Financial Market Volatility

The US dollar is a global reserve currency, and any significant disruptions or uncertainties in the US economy can lead to increased volatility in global financial markets. During debt ceiling negotiations, if there are concerns about the US government’s ability to meet its obligations, it could lead to market instability and risk aversion among investors. This could result in capital outflows from emerging markets like Ghana, leading to downward pressure on the Ghanaian cedi.

Investor Sentiment and Risk Perception

Investor sentiment plays a crucial role in currency valuation. If the US debt ceiling negotiations create uncertainty or dampen investor confidence in the US economy, it could have a spillover effect on other economies. In such situations, investors may prefer to move their investments to safe-haven assets, such as the US dollar, which could weaken the local currency.

Commodity Prices

Ghana is a major exporter of commodities like gold, cocoa, and oil. Changes in global market conditions, including those influenced by US debt ceiling negotiations, can affect commodity prices. If market volatility or economic uncertainty arises from the negotiations, it could impact commodity prices and subsequently affect Ghana’s export revenues and currency valuation.

Foreign Aid and Investment

The US plays a significant role in providing foreign aid and investment to various countries, including Ghana. If US debt ceiling negotiations result in reduced government spending or changes in aid policies, it could indirectly affect Ghana’s economy and its currency. Reductions in aid or investment inflows can impact Ghana’s fiscal position, balance of payments, and overall economic stability, potentially influencing the value of the Ghanaian cedi.

It’s important to note that the actual impact on the Ghanaian cedi would depend on various factors, including the nature and outcome of the US debt ceiling negotiations, global market conditions, and Ghana’s own economic fundamentals. The interconnectedness of global financial markets means that events in one country can have repercussions in others, and the US debt ceiling negotiations are one such example.

A Bond is a debt security where the issuer issues the bond for purchase by the bondholder (the lender / the investor). It is a fixed income security, as a bond usually gives the investor a regular and fixed interest payment referred to as coupons.

Investing in bonds can be a prudent choice for investors looking for stability, income, and diversification in their portfolios. They are mainly issued by Governments (treasury bonds) and Corporations (corporate bonds) when they want to raise money for projects or refinance existing debts.

By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the bond on a specified date (maturity date), and pay you coupons, usually twice a year.

Equities, also known as stocks or shares, represent ownership stakes in a company. Stocks are issued by companies when they decide to raise capital by selling ownership in the company to investors.

In exchange for buying these shares, investors become partial owners of the company and are entitled to a number of rights, key amongst which is a proportional share in the company’s distributed profits, known as dividends.

An investment strategy is not complete without a risk management plan which is very crucial whether you are investing in a stable, declining or a recovering market environment.

A risk management plan should keep your losses at levels that are acceptable whiles ensuring that you are able to meet short term emergencies that may arise during the investment period. One effective strategy to adopt is DIVERSIFICATION.

Investment diversification is a strategy used to manage risk by spreading your investments across various asset classes and assets. Its purpose is to reduce the potential impact of poor performance in any single investment on your entire portfolio. By diversifying, you aim to minimize the risk associated with putting all your investment resources in one place. This occurs as you apportion your investments in a manner that ensures that an adverse event impacting one asset will be offset by the good performance of other assets. Different assets and asset classes will also be affected differently by general economic trends thereby minimizing overall impact.

Here are a few key points to consider when it comes to investment diversification:

Different Asset Classes

Diversification involves investing in different types of assets such as stocks, bonds, real estate, commodities, cash equivalents, etc. Each asset class carries its own risk and return characteristics. By investing across various asset classes, poor performance in one asset class may not necessarily result in the poor performance of the entire portfolio. Allocating investments to various asset types can reduce losses, i.e. if one loses value because of fluctuating prices, the others could remain unaffected or may even gain value.

Different Industries / sectors

Within each asset class, diversifying across different sectors can help mitigate risk. For instance, within the stock market, you might invest in companies from various sectors like technology, healthcare, finance, consumer goods, and energy. Thus, if you happen to buy shares, select ones in industries that are not directly related, e.g. banking, technology, and manufacturing. This way, if one sector performs poorly, the others may offset the losses.

Different Maturity Lengths

While diversifying, maturity lengths help to reduce risk. Investors must consider their own liquidity needs and expectations. Instead of investing in an instrument or instruments with similar maturity profiles, you can create a portfolio of assets with staggered maturities. For example, you might invest in bonds with one-year, three-year, five-year, and ten-year maturities. This strategy allows you to have a continuous stream of maturing bonds, providing flexibility to reinvest or access funds as needed.

Different Geographical locations

It is a good practice to find investment alternatives in other countries that have a positive economic outlook. Economic conditions and market cycles can vary across regions. By investing in different countries, you can reduce the impact of a downturn in any one country on your portfolio.

Risk Tolerance

Consider your risk tolerance and investment goals when diversifying your portfolio. Conservative investors may lean towards a higher allocation of bonds or cash equivalents, while more aggressive investors may have a higher allocation of stocks or alternative investments.

Some Risks associated with diversifying

It is however necessary to note that while diversification is generally considered a risk management strategy, it is important to understand that it does not completely eliminate risk.

Further, too many diversified assets in a portfolio can lead to higher management costs.

Diversifying into unfamiliar asset classes or investments without proper knowledge and research can increase the risk. It is important to understand the characteristics, risks, and dynamics of each investment before including them in your portfolio.

The Way Out

To mitigate these risks, it is crucial to regularly review and monitor your portfolio, stay informed about market conditions, and maintain a balanced approach to diversification. Regularly assess your portfolio and make adjustments as necessary to maintain a diversified allocation. Changes in market conditions, economic factors, or your own financial situation may necessitate adjustments to your diversification strategy.

It is also advisable to seek professional financial advice to ensure your diversification strategy aligns with your investment goals, risk tolerance, and time horizon.

Having reached a staff level Agreement in December 2022, Ghana has finally, secured an International Monetary Fund (IMF) Executive Board approval for a US$3 billion bailout;

An initial disbursement of the first tranche of US$600 million to Ghana’s account was made on May 19, 2023. Subsequent disbursement will be made every six months based on performance review by the IMF;

A few points to note on the potential impact of the bailout are as follows

Cedis vrs. Major Trading Currencies: One key goal of the IMF program is to reach a unified and flexible exchange rate. This has the tendency to restore stability and instill confidence in the economy. Consequently, this may improve market sentiment and reduce speculation against the local currency. Thus, the exchange rate may stabilize or experience less volatility.

Boost of Domestic Economy: The involvement of the IMF in a country’s economic recovery can boost investor confidence. This can attract foreign direct investment, stimulate economic growth, and create employment opportunities for citizens. Increased investment can lead to the development of infrastructure, industries, and businesses, ultimately improving the overall standard of living.

Transparency and Accountability: As part of the bailout program, the IMF recommends the implementation of a public finance management reforms. These reforms, amongst others, allows an integration of all government expenditure into the budget planning and accounting systems. This aims to enhance the efficiency and accountability of government spending, improve budget formulation and execution, and strengthen internal controls and auditing mechanisms. This potentially promotes more transparent and accountable practices, ensuring that public resources are used effectively and for their intended purposes.

Improved Living Standards: The program also aims at fast-tracking the implementation of key growth-oriented programs such as the Ghana CARES (Obaatan Pa) Program. Benefits under the LEAP are being doubled, while the school feeding programme is being adjusted to counteract the effect of the inflation. These are expected to ensure continued access to basic services, particularly for vulnerable populations.

Availability of resources: The program emphasizes fiscal discipline and sound financial management. This has the potential to lead to more efficient use of public resources, reduced budget deficits, and increased fiscal transparency. Ghanaians can benefit from better government budgeting and management, which can help ensure the availability of resources for public services and investments.

However, it’s worth noting that receiving an IMF bailout also comes with potential drawbacks;

Potential Austerity Measures: The conditions attached to the bailout, often involve austerity measures and structural reforms, which can result in short-term economic distress and social hardships;

Impact of Domestic Policies: The bailout can be adversely influenced by the domestic policies and governance, as well as the extent to which the government implements and manages the conditions attached to the bailout;

Government’s ability to implement reforms: The success of these efforts will depend on the government’s ability to implement reforms and manage public finances responsibly.