Banks were unprepared for DDEP – PwC survey says
The 2023 Ghana Banking Survey conducted by PwC has unveiled a startling revelation, exposing the unpreparedness of banks in Ghana for the recent Domestic Debt Exchange Programme (DDEP) launched by the Ministry of Finance in December 2022.
According to the report, financial institutions displayed a lack of foresight, missing crucial signals that should have alerted them to the vulnerabilities of their investments in government securities.
Rating Downgrades Unheeded
Fitch Ratings had downgraded Ghana’s issuer default rating (IDR) for its long-term local currency (LTLC) and long-term foreign currency (LTFC) debt instruments on four separate occasions during 2022. Regrettably, banks seemingly failed to act on these red flags, culminating in unexpected ramifications for their portfolios.
Heavy Exposure and Crowding-Out Effect
The survey’s in-depth analysis of banks’ financial statements revealed an alarming trend. By the end of 2022, banks’ average holdings of government securities stood at 32.7% of total assets, marking a significant reduction from the previous year’s 46.2%. This emphasized the banking sector’s direct and pronounced exposure to the government’s fiscal policy and its concomitant crowding-out effect on private enterprises.
Hindsight: A Bitter Lesson
PwC’s survey posed the question, “What could have been done differently before the implementation of the DDEP?” An overwhelming majority of respondent banks, comprising 94%, conceded that a prudent reduction in their positions in government securities would have served as a buffer against the DDEP’s disruptive impact.
Robust Risk Management and Economic Research Imperative
Disturbingly, over a third of respondent banks (37.5%) admitted to the lack of robust economic policy and market research in their decision-making processes. The absence of rigorous scenario-planning, scenario-testing, and stress-tests further underscored the industry’s failure to anticipate the shockwaves of the DDEP.
Bank-Type Disparities
Survey responses reflected disparate viewpoints among different types of banks. Only 29% of local banks claimed they would have opted for less significant positions in government securities. However, a unanimous 100% of regional banks asserted they would take a softer stance in such investments. Meanwhile, two-thirds (67%) of international banks stated they would pursue similar caution.
Risk Mitigation Key to the Future
As the dust settles, the survey indicated a unanimous focus across the banking spectrum on enhancing risk assessment and management systems. These findings indicate a collective recognition of the urgent need for fortifying risk mitigation strategies in the face of potential future adversities.
As the Ghanaian banking sector grapples with the aftershocks of the DDEP, the survey serves as a stark wake-up call for institutions to cultivate resilience and vigilance in managing their investments. The repercussions of this ill-preparedness reverberate through the industry, making a robust and forward-looking approach to risk management more imperative than ever.
