Background

Ghana was on a positive track pre-pandemic as the country maintained consistent economic growth evidenced by a 6.8% average annual gross domestic product (GDP) growth between 2010 and 2019. Within this period, a successful clean-up of the banking sector was executed and various measures to bolster financial stability were also implemented. However, since 2020, Ghana has contended with severe economic and fiscal distress with the government asserting that the pandemic spurred the crisis which was further exacerbated by the Russia-Ukraine war. While these factors were major instruments that delivered the final blow to the Ghanaian economy, many of the cracks were quite evident well before the pandemic. Fiscal indiscipline and a borrowing spree that eroded the country’s revenues and bloated debt levels, particularly between 2014 and 2019 were foundational issues that drove Ghana’s economy to its current distressed state. The country’s public debt-to-GDP ratio spiked to 63% in 2019 from 39.7% in 2011 and further grew to 88.1% as at 31 December 2022 as the government continued to borrow. Eventually, the high debt levels elicited a surge in the country’s debt service to revenue which stood at 117.6% as at 31 December 2022 and pushed the International Monetary Fund (IMF) and World Bank to classify Ghana as a “high risk of debt distress” economy. Ultimately, the weak finances of the Ghanaian central government during a stressed macroeconomic climate engendered rating downgrades which adversely impacted the country’s access to the International Capital Market. The foregoing coupled with Ghana’s sustained budget deficit over the years meant its financial capacity to meet its debt obligations deteriorated sharply.

Figure 1: Ghana domestic public debt holders as at 30 April 2023

Source: Ghana Central Securities Depository

In response to the fiscal crisis, on 5 December 2022, the Ghanaian government introduced a voluntary Domestic Debt Exchange Programme (DDEP) which invited local bond investors to voluntarily exchange existing domestic bonds for new bonds. The old bonds were worth approximately GH¢ 97.7 billion and mostly had tenors ranging from 2023 to 2029 while the new bond series has extended maturity dates that span 2027 to 2038 and reduced coupon rates. On 19 December 2022, the Ghanaian Finance Ministry also announced the suspension of debt service payments on most of its external debt, including commercial and some bilateral loans. This ultimately meant defaulting on the cumulative interest payment of about $580 million due on several Eurobonds in 2023 and the $148.8 million principal repayment due on the $1 billion 2023 Eurobond by 7 August 2023.  However, there have been some positive developments for the country in recent months. As at 10 February 2023 when the timeline for the DDEP elapsed, the country recorded an 85% eligible bond participation rate from local bond investors. Meanwhile, the IMF also approved a $3 billion bail-out for Ghana under an Extended Credit Facility on 17 May 2023 while the country negotiates a debt restructuring with China and Paris Club. Following the DDEP, Ghana has placed its focus on restructuring its external debt of about $30 billion and is aiming for a $10.5 billion debt service relief.

Impact of Ghana’s Turmoil on Nigerian Banks

Nigerian banks are exposed to the Ghanaian economic and fiscal crisis through subsidiaries operating in the country and investments in Ghana bonds. As at 31 December 2022, the Nigerian Banking Industry (“the Industry”) had direct and indirect (through subsidiaries) Ghana Eurobond holdings of about ₦800 billion (or $1.7 billion) which accounted for an estimated 4% of the Industry’s total investment securities. The suspension of interest and principal payment on these bonds by the Ghanaian central government constituted a default in substance and this resulted in bondholders taking haircuts on its value, particularly the investments classified in the amortised cost category. Consequently, the affected Nigerian banks recorded impairment charges on the bond, varying from 10% to 59% of the outstanding value of their respective investments. Overall, the Industry booked a cumulated impairment charge of about ₦280 billion ($604 million) on Ghana bonds which eroded an estimated 19.7% of the the Industry’s pre-impaired operating profit. While the impact of the Ghana exposure is mostly concentrated amongst the tier 1 commercial banks in Nigeria with a few tier 2 and 3 commercial banks, the write down in the value of these bonds had a prominent impact on the Industry’s profitability, given the size of the exposed banks.  Also, the impairment charges negatively affected the Industry’s ability to enhance capital from operations as profit retained was suppressed.

Table 2: Impairment charge of select banks as at FYE 2022	Table 3: Ghana bond exposure to total investment securities as at FYE 2022

Source: Select banks audited financial statements and Agusto&Co Research

Nothwithstanding the spike in impairment which adversely impacted profitability, we believe the capital position and performance of the top Nigerian banks (Access Bank Plc, Zenith Bank Plc, United Bank for Africa Plc and Guaranty Trust Bank Plc) which were the most impacted would remain acceptable, at least in the near term, while the average capital adequacy ratio of these banks should be comfortably higher than the 15% regulatory minimum for international banks. Nonetheless, the Ghanaian subsidiary of these top Nigerian banking institutions would remain pressure points to performance, asset quality and capitalisation. It is noteworthy that the Ghana subsidiaries of these banks, in addition to being exposed to the government securities, are impacted by the prevailing economic turmoil that has weakened their asset quality and earning power as the Ghanaian cedi depreciates against the USD, interest rate rises and inflation remains high.

In addition to the above, we believe the default by Ghana would elicit relatively higher impairment charges on sovereign bonds of many Sub-Saharan African countries as the yields on these emerging market bonds trend upward at the International Capital Market. While there was already a dwindling appetite for Sub-Saharan African bonds by Nigerian banks, we expect this development to increase apathy for these treasury instruments further.