Ghana: Sovereign-Bank Nexus Risks Materialize

The government of Ghana’s impending domestic debt exchange has negative implications for the domestic banking system, and in turn the real economy. Interdependencies between the sovereign and banking sector have deepened over the years – with the sovereign growing more reliant on the banking system for financing and government debt holdings accounting for an important share of banking sector profits. As a result, Ghana’s sovereign-bank nexus – the interlinkage between the sovereign and the banking system – is one of the strongest among emerging market economies, with the share of bank holdings of sovereign debt only exceeded by Egypt and Pakistan, and only slightly. 

Commercial banks hold c.GhS65 bn of the Government of Ghana’s GhS190bn outstanding domestic debt, with the domestic banking system funding roughly 35% of the c.GhS158bn increase in domestic debt since 2015, more than any other single investor group. Public debt has risen to GhS575.7bn ($46.8bn) at the end of 2022, equivalent to >100% of GDP, from 62% of GDP in 2019. 

On Monday 23 January, the Ministry of Finance announced it had secured the Ghana Association of Banks participation in the debt exchange, with the banks managing to secure some improvements on the original terms offered by the government. The banks (as well as insurers) can now expect a 5% coupon payment in 2023 and an effective coupon rate of 9% on all new bonds instead of the previous coupon step-up from 0% in 2023 to 5% in 2024 and 10% from 2025 onwards. That said, the new coupon terms still represent significant losses for the banking system when compared to the c.19% weighted average rate on the old bonds.

Banks face credit losses from the impairment of bank assets in the form of government securities due to the debt exchange and a sharp decline in interest income in 2023 and beyond. Most banks earn 35-50% of their income from domestic government securities, with the latter constituting c.30% of total assets ( Prior to last week’s agreement, under the first iteration of the Debt Exchange Program, the government was expected  to be saving c. GhS62bn (7.8% of GDP) in interest and amortization payments, with banks expected to forego c.GhS27bn in income. This would have more or less wiped out the banking system’s net interest income for the year in 2023 – for reference, net interest income was GhS12.8bn during the first 10 months of 2022 according to data from the Bank of Ghana. 

Despite the government revising its earlier stance of paying no interest on bonds in 2023, the income hit to the banking system is still substantial, with the banks now estimated to be sacrificing c.GhS15bn in debt repayments from the government . We expect this loss in income to wipe out profits for 2023 (profit-after-tax for the first ten months of 2022 was c.GhS4.4bn) and threaten capital and liquidity positions of Ghana’s banks. Banks’ prudential capital position is already strained, with CAR for the banking system having declined from 19.6% in 2021 to 16.6% at end-2022 (Bank of Ghana). 

The impact on Ghana’s banks is not uniform given the significant differences in the credit risk characteristics of incumbents. For example, local banks will be less impacted from the debt exchange than foreign banks as they tend to hold materially less government securities as a proportion of their liabilities, as represented by their liquidity ratios (see chart from However, this is partially offset by the lower capitalization of local banks relative to their foreign counterparts ( 

Despite their high exposure to government securities, Ghana faces the tangible risk of setting off a negative feedback loop, where the debt exchange triggers bank distress and a sharp reduction in lending to the private sector.

Reflecting these risks, the government has offered to set up a liquidity facility. The Ghana Financial Stability Fund (GFSF) is a US$1bn facility expected to provide the banking system, insurance companies and other financial sector entities with cash flow to meet their obligations as they fall due, in view of the cash flow challenges that are likely to result from the debt exchange programme. Crucially, the GFSF is not yet funded – the government has indicated it expects the World Bank and other donors to capitalize the fund, but this has yet to materialize, and may be subject to initiation of the IMF program.

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