According to Fitch Ratings, Ghanaian banks may experience severe pressure on their capitalization as a result of the restructuring of local-currency (LC) state debt.
When banks replace their current debt with new bonds that have lower coupons and longer tenors, according to Fitch, they will experience significant economic losses.
This could result in significant capital shortages at certain banks, but we anticipate that regulatory forbearance would lessen the effect and allow banks to continue complying with minimum capital standards.
Despite regulatory forbearance, the two Ghanaian banks that Fitch rates have sizable capital reserves that should support their ratings throughout the LC debt swap.
The beginning of the LC debt swap on December 5 coincides with Ghana's efforts to obtain IMF assistance. Fitch downgraded Ghana's Long-Term Local-Currency Issuer Default Rating (IDR) to "C" from "CC" as a result, describing it as a troubled debt exchange.
The debt exchange is voluntary, according to Ghana's Ministry of Finance, but we anticipate banks to participate, especially since the risk-weighting for the old bonds will increase to 100% from 0% and because banks that don't participate won't be eligible for liquidity support from Ghana's recently established financial stability fund.
According to data from the Bank of Ghana, Treasury Bills make up 15% of the securities held by the banking sector but are not included in the restructuring.
We predict that banks swapping old LC government bonds would have a net present value loss of around 50% based on the coupon rates and tenors of the new bonds and assuming a 20% discount rate.
This would seriously reduce the capitalization of the financial sector.
However, we anticipate the authorities to relax regulatory capital requirements so that banks may still maintain minimum capital ratios and to permit creative accounting treatment to considerably minimise losses.
The formal response date for holders of LC government bonds, which was initially set on 19 December, has now been extended until 30 December.
A further delay of the deadline and even an easing of the conditions, which would lessen the losses imposed on creditors, are possibilities given Fitch's assessment that there is significant disagreement to the terms of the exchange.
The government announced intentions to restructure its foreign sovereign debt on December 20, 2022, increasing the strain on banks' capital.
Payments on a subset of foreign debt, including Eurobonds, commercial term loans, and the majority of bilateral debt, have been halted, though specifics have not yet been disclosed.
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