Debt exchange could lead to material capital shortfalls in Ghana’s banking sector
Ghana’s banking sector is bracing for a significant impact as a result of the Domestic Debt Exchange Programme (DDEP) that has just concluded. According to a statement from ratings agency Fitch, banks holding large amounts of local currency government bonds will experience a material weakening of their capitalisation, with a potential net present value loss of almost 50% likely to occur.
The restructuring of the government bonds was initiated by the Ministry of Finance and was designed to address concerns around the country’s high debt burden. Despite the voluntary nature of the DDEP, which allows creditors to swap eligible government bonds for new ones with lower coupons and longer tenors, Ghanaian banks have been highly incentivised to participate. This is due to the old bonds’ risk-weighting being increased from 0% to 100%, and non-participating banks being ineligible for liquidity support from the newly created Ghana Financial Stability Fund.
The debt exchange has been subject to multiple delays and modifications since its launch in December 2022. Creditors representing approximately 85% of eligible bonds eventually took part in the programme. However, the remaining 15% of the banking system’s securities, represented by treasury bills, were excluded from the exchange.
Fitch’s estimate of a net present value loss of almost 50% is based on the coupon rates and tenors of the new bonds and a discount rate of 20%. The agency has also warned that the restructuring could lead to material capital shortfalls at some banks, which could have knock-on effects for the wider banking sector.
This is not the first time Ghana’s banking sector has faced challenges in recent years. In 2017, the Bank of Ghana embarked on a clean-up exercise that saw nine banks being declared insolvent and subsequently collapsed. The move was part of a wider effort to address concerns around non-performing loans and capital adequacy ratios.
While the DDEP is a voluntary programme, the impact on the banking sector could be significant. The risk-weighting of the old bonds being increased to 100% means that banks may need to hold more capital against their holdings, which could affect their lending ability. The exclusion of treasury bills from the exchange also means that banks holding these securities may be less incentivised to participate, potentially leading to further imbalances in the sector.
The DDEP has closed, and Ghana’s banking sector will be closely monitoring the impact of the restructuring. With concerns around debt levels and capital adequacy ratios, it is essential that banks maintain sufficient capital levels and adapt to any changes resulting from the programme. While the government’s efforts to address these issues are commendable, the success of the programme will depend on its ability to balance the needs of the banking sector with those of the wider economy.
