The Nigerian banking industry is still feeling the impact of the Ghana Eurobond default as banks in the country with subsidiaries across Africa had direct and indirect Ghana Eurobond holdings of about N800 billion ($1.7 billion), accounting for an estimated 4 per cent of the Industry’s total investment securities.
Last year December, the Ghanaian Finance Ministry 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.
GoG is currently restructuring most of its public debt, estimated at 576 billion cedis or $49 billion. The West African nation exchanged 87.8 billion cedis of notes that paid an average of 19 per cent, with bonds returning as little as 8.35 per cent resulting in losses for financial institutions.
Banks from across Africa and even the UK have been affected by Ghana’s debt restructuring. That coupled with accelerating inflation and a weaker currency have deterred companies in a nation that once used to lure investors.
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 per cent 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.
According to a report by Agusto & Co, titled, “Ghana Debt Crisis and the Impact on Nigerian Banks,” 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, with 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.
“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 per cent to 59 per cent of the outstanding value of their respective investments.
“Overall, the Industry booked a cumulated impairment charge of about N280 billion on Ghana bonds, which eroded an estimated 19.7 per cent of 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.”
The report noted that notwithstanding the spike in impairment which adversely impacted profitability, it believes that the capital position and performance of the top Nigerian banks namely 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 per cent 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,” it stated.
