Absa takes a hit with Ghanain debt crisis

In a trading update, the Absa Group said that Ghana’s sovereign debt crisis is a “potential risk to our 2022 performance” and would result in their “credit impairments to increase significantly year-on-year”.

Ghana announced in December 2022 that it was suspending its repayments on Eurobonds, commercial loans, and bilateral loans in an effort to restructure its debt.

The finance ministry said that this was an “interim emergency measure” to shore up the country’s finances.

A debt restructuring was agreed to as a condition for support from the International Monetary Fund (IMF) which tabled a $3 billion support package.

Ghana had its credit ratings downgraded, with Fitch classifying it as a “restricted default”.

The total sovereign debt of Ghana stood at $55 billion at the end of 2022, costing the government 70% to 100% of its total revenue to service it.

Commercial banks own roughly one-third of Ghana’s debt, with institutional investors owning 25% and foreign investors holding 9%. In total, 64% of the debt is owned by private lenders.

The government announced a plan at the end of 2022 to swap $10.5 billion in local bonds with newly issued bonds.

As of February 2023, the government had concluded debt exchanges with 85% of bondholders eligible for the restructuring.

The fallout

Fitch Ratings has warned that banks exposed to Ghana’s debt restructuring could “face significant pressure on their capitalisation”.

The rating agency “believes that banks will suffer large economic losses” when the old debt is exchanged for new debt. Fitch quantifies the losses at roughly 50%

Fitch ultimately views this as the beginning of a sovereign default process which may completely wipe out the value of the debt held by private lenders.

Absa sees “Ghana’s sovereign debt crisis as a potential risk to our 2022 performance”, reducing the group’s return on equity by more than a percentage point.

Absa has “built significant coverage against our sovereign bond exposure in Ghana” but still expects their “credit impairments to increase significantly year-on-year” due to the debt crisis.

However, Absa does expect its local business unit to remain solvent and operate as expected.

The Group expects its credit loss ratio to remain similar to its first half of 2022 at 91 basis points. However, this is only when excluding impairments relating to Ghana’s debt crisis.

This credit ratio is already at the higher end of Absa’s 70 to 100 basis points range. The impairments in Ghana may push this ratio above 100.

Absa expects its revenue to increase by double-digits in 2022, driven primarily by non-interest revenue from its insurance operations.

Absa releases its full-year results for the year ended 31 December 31 2022 next week.