A recent report by Fitch Solutions has forecasted a continued decline in the capital buffers of banks in Ghana throughout 2024, positioning them unfavorably compared to their counterparts in sub-Saharan Africa.
The study attributes this anticipated deterioration to the aftermath of the Domestic Debt Exchange Program (DDEP), which had a profound impact on the country’s banking sector.
According to the report, nations such as Côte d’Ivoire and Nigeria are expected to witness an improvement in their Capital Adequacy Ratios (CAR) due to positive economic conditions. Notably, Nigerian banks are projected to bolster their capital buffers by capitalizing on foreign currency revaluation gains.
In contrast, Ghana is facing a more challenging landscape as a result of the DDEP, which saw the government swapping bonds totaling GHS82 billion for 12 new ones at reduced coupon rates and longer tenors. The move adversely affected the liquidity and capital of banks, prompting the Bank of Ghana to issue a three-year deadline for recapitalization.
All banks in Ghana have submitted their capital restoration plans to the central bank, which has expressed satisfaction with the proposed strategies. However, Fitch Solutions highlights concerns about the ongoing capital deterioration, particularly emphasizing that Ghana’s situation is more pronounced than other countries in the region.
The report emphasizes the severe distress in the Ghanaian financial sector, as noted by banking expert Dr. Richmond Atuahene. He attributes the insolvency within the banking system to the DDEP, stating that using a 16 percent discount rate for Net Present Value calculations on government bonds reveals losses of ¢37.7 billion. Private domestic banks and state-owned banks accounted for ¢19.9 billion in losses, while foreign-owned banks faced ¢17.8 billion.
The impairment losses from the DDEP have rendered some locally-owned banks in Ghana technically insolvent, necessitating additional capital support from shareholders or full participation in the Ghana Financial Stability Fund. Fitch Solutions predicts that in the coming months, Ghanaian banks will intensify efforts to build up capital buffers to offset further losses stemming mainly from the DDEP, while safeguarding against deteriorating loan quality.
