Long-term debt instruments remain popular among banks despite debt exchange programme
Ghana’s banking sector has witnessed a shift in its investment portfolio in 2022, with long-term debt instruments or securities remaining the largest component despite the implementation of the Domestic Debt Exchange Programme (DDEP). This is according to the Bank of Ghana’s latest report, which highlights that banks’ investments contracted by 4.8% in 2022, reaching ¢79.2 billion in December 2022 from a growth of 29% in 2021.
Despite the decline in investments, securities or long-term debt instruments such as bonds continued to dominate the investment portfolios of banks, with their share increasing to 76.4% in December 2022 from 75.3% in December 2021. This suggests that banks are still finding long-term debt instruments to be attractive despite the government’s push towards shorter-term debt instruments.
In contrast, the share of short-term bills or Treasury bills in total investments declined to 23.3% from 24.4% over the same comparative period, reflecting the impact of the DDEP on the banking sector. The programme, which was implemented to manage the country’s domestic debt and reduce its overall cost, led to the government’s issuance of new long-term bonds to replace existing shorter-term ones. This move, however, seems to have had a limited impact on the banking sector’s preference for long-term debt instruments.
Meanwhile, equity investments remained negligible at 0.3%, suggesting that banks still prefer debt instruments over equity investments. This may be due to the relatively higher risk associated with equity investments compared to debt instruments, especially in Ghana’s volatile economic environment.
The decline in investments in 2022 was largely attributed to the portfolio reallocation by banks in response to higher Cash Reserve Ratio requirements introduced during the year and the DDEP. The Cash Reserve Ratio is the percentage of deposits that banks are required to hold in reserve with the central bank. The increase in this requirement reduces the amount of funds available for investment, leading to a shift in banks’ asset portfolios in favour of loans and other assets.
As a result of the portfolio reallocation, the share of investments in total assets declined to 35.8% in December 2022 from 46.2% in December 2021. Short-term bills and long-term securities both experienced similar declines, with bills contracting by 9.2% and securities declining by 3.3% at the end of December 2022.
Overall, the latest report from the Bank of Ghana suggests that the banking sector in Ghana continues to favour long-term debt instruments despite the implementation of the DDEP. However, the decline in investments in 2022 highlights the impact of regulatory measures on banks’ investment decisions, as well as the need for banks to rebalance their portfolios in response to changing market conditions.
