Domestic debt exchange program and financial institutions

King Enam Elinam, Accra, Ghana
March 1st, 2024

A survey, from the Ghana Association of Banks (GAB), following the completion of the domestic debt exchange program (DDEP) revealed a surge in net impairment losses on financial assets from US$101.8 million (GH₵1.43 billion) in 2021 to US$1.38 (GH₵19.5 billion) in 2022¹. Capital adequacy ratio (CAR) of the sector, measured with Bank of Ghana (BoG) regulatory forbearance model fell from 19.4 percent in June 2021 to 14.2 percent in August 2023². The GAB ascribes these losses to the negative effects of the DDEP. During the same period, the Bank of Ghana (BoG) also reported that its subsidiaries recorded a negative net worth of US$4.2 billion (GH¢65.40 billion - up from a deficit of US$3.52 billion - GH¢54.52 billion in 2022) at the end of 31 December 2023. The BoG also said that the losses reflected the negative impact of the DDEP³. Fitch Rating agency agreed. In its evaluation of Ghana credit worthiness, Fitch indicated that Ghanaian banks ‟suffered considerably in 2023”⁴.

The DDEP involved an exchange for new Ghana bonds with a higher coupon and longer average maturity. Over 95 percent of bond holders, which included financial institutions, voluntarily took part in the exchange. At the beginning of the DDEP, commercial bank held 40 percent of their assets in goverment securities.⁵

Debt instruments

The DDEP targeted five types of instruments, including securities holdings by the Bank of Ghana and US Dollar denominated bonds. It also targeted COCOBOD bonds (or COCOBOD bills) and debt instruments in the portfolio of pension funds.

1- Domestic notes and bonds

At the beginning of the process, the debt exchange memorandum stipulated that Treasury bills and certain non-marketable securities issued by the Republic of Ghana were not subject to this invitation to exchange. But the government subsequently amended the memorendum to add 12 new bonds. In total 60 notes and bonds qualified for the exchange for a total value of US$8.14 billion (GH₵126 billion).

2- US Dollar-denominated bonds

The second class of instrument to fell within the scope of the debt exchange were US Dollar-denominated bonds. The government issued dollar-denominated bonds in the framework of the 2019-2022 Medium-Term Debt Management Strategy (MTDS). One goal of this issuance was to diversify the investor base and also the currency structure of the public debt portfolio. This borrowing reduced the refinancing risks to the government debt portfolio. Today, the face value of outstanding active domestic dollar bonds issued by the Government was US$809 million in August 2023.

On August 25th, 2023, the Ministry of Finance announced the closure of its tender for US Dollar-denominated bonds. At the end of the operation, investors had tendered US$741.7 million of US dollar-denominated bonds. Authorities estimate that over 91.7 percent of investors tendered their old bonds for new ones. The government reduced the average coupon rate from 5.4 percent to 3.0 percent and extended maturity from 1.5 years to 4.5 years.

3- ESLA Bonds

The government promulgated the Energy Sector Levies Act (ESLA) in 2015 to aggregate levies collected under the sector. Its first goal was to provide funding for power generation. The second was to repay US$711.9 million (GH₵ 10 billion) worth of debt. Debtors included banks, suppliers, and sub-contractors.

ESLA PLC served as an SPV for the issuance of up to US$1.6 billion (GHS 10 billion) in bonds securitized by a special gasoline tax scheme, authorized by the 2015 Energy Sector Levy Act (ESLA) to help pay off energy sector debts. Commercial Banks held 42.38 percent while corporation and other institutions together held 25.62 percent of these bonds.

4- Daakye Bonds

The Daakye program was part of a 10-year, GHS 9 billion (about US$1.5 billion) funding strategy to finance socio-economic program in Ghana. The first round of funding which took place in 2020 raised GHS 2.4 billion (about US$390 million) for the national education system so far. The mechanism consisted in the securitization of future government tax flows without issuing traditional government debt and also without donor derisking support.

Under the Daakye Trust PLC, the Ghana public Education Trust Fund (GETFund) issued bonds to provide funding for the construction and completion of education infrastructure. This issuance also helped to complete ongoing educational projects. The Daakye Trust Plc served as a special purpose vehicle to issue the bonds. This Trust then listed the bonds on the Ghana Fixed Income Market (GFIM). A portion of GETFund receivables securitized the issuance.

5- COCOBOD

Financial institutions are the largest investors in COCOBOD debt instruments. As at the beginning of the debt exchange process, the total indebtedness of COCOBOD (excluding its public indebtedness, which is represented by the amounts outstanding under the Eligible Bills) was US$877,4 million. On September 7, 2023 COCOBOD announced the settlement and conclusion of its Cocoa Bills exchange program.

The Cocoa bill’s exchange started on 14th July, 2023 with an eligible amount of US$564 million (or GH₵7.9 billion). The Exchange closed on 25th August, 2023 and settled on 4th September, 2023. Investors tendered bills worth US$549,7 million (GH₵7.7 billion). Authorities disclosed that the exchange received the participation of 97.4 percent of bond holders. This transaction converted the bills into five additional securities maturing in 2024 (5.0 percent of the bonds) and 2025 (20.0 percent). The rest of the bonds represented 25.0 percent and matured in 2026, 2026 and 2028. The new bonds have a fixed interest rate of 13.0 percent.

Recovery

The performance of financial institutions, especiallhy banks has improved, according to recent BoG reports (January 2024, monetary policy committee report - MPC). The bank reported an increase in net interest income, fees,commissions and profitability for the sector after losses in 2022. The MPC report suggests that the industry’s balance sheet remained strong 2023 as increased deposits boosted assets at the end of 2023. The capital adequacy ratio are now above the regulatory minimum, while liquidity and profitability ratios also increased between January 2022 and December 2023. The BoG attributes the improvement to an increase recapitalization by shareholders and to short-term financing from the government’s Financial Stability Fund.

Regulatory forbearance and an adjustment of the accounting treatment temporarily reduced regulatory capital and liquidity requirements. However, forbearance on the recognition of debt exchange losses in CAR computations will be lifted by one-fourth each year from 2022 through 2025.

Outlook

The International Monetary Fund (IMF) deemed the DDEP as successful. It cited the participation rate of 95 percent and the speed with which the government executed the program (less than 12 months) as key success factors. The DDEP generated US$3.6 billion (GH₵50 billion) in cash debt relief in 2023, according to the IMF⁶. But, the post-DDEP debt portfolio will remain a part of the public finance liabilities until at least 2039.

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