Standard Bank, Africa’s largest bank by assets, said in its latest results that it had raised provisions across Africa as “sovereign credit deterioration” poses a risk to its operations.
Due to rising inflation, a strong US dollar, and low economic growth, many African countries have seen their balance of payments deteriorate in 2022.
This has resulted in some struggling to service their debt, particularly foreign debt. Chief among these countries is Ghana, which could be a warning for other African countries.
Ghana announced in December 2022 that it was suspending its repayments on Eurobonds, commercial loans, and bilateral loans to restructure its debt.
Ghana had its credit ratings downgraded, with rating agency Fitch classifying it as a “restricted default”.
Fitch has warned that banks exposed to Ghana’s debt restructuring could “face significant pressure on their capitalisation”.
The rating agency believes banks will “suffer large economic losses” when the old debt is exchanged for new debt. Fitch quantifies the losses at roughly 50%.
The restructuring is a key condition for the nation to finalise access to a $3 billion bailout from the International Monetary Fund.
Standard Bank raises R1.5 billion provision in Ghana
Standard Bank made provisions to cover more than half of its holdings of Ghanaian bonds as the country works to reorganise its debt.
Standard Bank set aside R1.5 billion to cover potential losses arising from the West African nation’s loan-restructuring program, it said in a statement on Thursday.
The bank said its total domestic and onshore dollar-denominated bond holdings are about R2.6 billion. This equals a coverage rate of 56%.
Standard Bank’s group-wide credit loss ratio remained flat relative to 2021 levels. However, credit impairment charges were up 22%.
In their annual report, the bank said these charges were “driven by a deterioration in its Africa Regions, particularly Ghana”.
Its credit impairment charges in Africa, excluding South Africa, jumped 86% in 2022 to a total of R3.85 billion, with a credit-loss ratio of 93 basis points.
Credit impairment charges increased to R12.1 billion in 2022, up from R9.8 billion in 2021. R1 billion of this increase is attributable to charges relating to Ghana’s debt crisis.
Standard Bank cautioned that sovereign credit deterioration is a risk across Africa in 2023, with countries such as Nigeria, Kenya, and Malawi in distress.
This resulted in the bank raising its group-wide provisions to R55.8 billion, with notable increases in Ghana, Malawi, Kenya, Mozambique, and South Africa.
Standard Bank joins FirstRand and Absa in covering potential losses in Ghana, which is working on restructuring most of its public debt, estimated at 576 billion cedis ($45 billion).
Absa sees Ghana’s sovereign debt crisis as “a potential risk to our 2022 performance”, reducing the company’s return on equity by more than a percentage point.
Absa has built significant coverage against its sovereign bond exposure in Ghana but still expects its credit impairments to “increase significantly year-on-year” due to the debt crisis.
FirstRand estimates a loss of 57%, which equates to nearly R500 million, on its bond holdings in Ghana. This is “on the conservative side”, according to CEO Alan Pullinger.