Ghana's Growing Debt Pile Seen as Only Cure for Bad Banks

(Bloomberg) -- Ghana is borrowing its way out of a banking crisis.

The government of West Africa’s second-biggest economy --- its budget already stretched by interest costs that consume about a third of its revenue -- is piling on debt to cover the liabilities of failed lenders and settle arrears dating back 20 years. It was left with little choice but to issue bonds to save an industry the International Monetary Fund sees as a financial-stability threat.

“If you don’t intervene then you breed systemic risk,” George Bodo, a Nairobi-based banking analyst at Ecobank Capital Ltd., said by phone. “These banks hold deposits. The central bank and the government have to do whatever it takes to protect the public.”

The country’s central bank is seeking to bolster the sector by revoking the licenses of poorly governed companies and implementing stricter guidelines on capital buffers. It comes as President Nana Akufo-Addo’s administration hopes to reverse a slump in lending and keep alive a target for 6.8 percent economic growth this year, among the fastest in Africa.

IMF Bailout

Ghana, in the final year of an IMF bailout totaling almost $1 billion, has issued 13.2 billion cedis ($2.8 billion) of bonds over the past 10 months that will go toward the sector, with the Washington-based lender’s blessing. Part of that issuance included about 5.3 billion cedis of payments on behalf of energy companies that had accumulated 10 billion cedis of debt over a two-decade period.

Read more: Payback Comes for Ghana Banks After 20-Year Wait for Money

Those payments have done little to ease a surge in souring loans as lenders race to meet a year-end deadline of raising their capital levels more than threefold to 400 million cedis. Non-performing loans surged by almost 21 percent to a record 8.63 billion cedis in April compared with a year earlier, according to central bank data. That pushed the industry’s NPL ratio to 23.5 percent from 19.8 percent in April 2017.

The new capital adequacy requirements have spurred a series of mergers and acquisitions among the 31 remaining registered banks in the sector, while also contributing to the failure of others.

Debt Burden

The central bank earlier this month announced that five small, insolvent lenders will be combined into one new entity that will be given a fresh capital injection and have its debt cleared. It withdrew the licenses of two other banks last year, transferring some of the assets to GCB Bank Ltd. and providing the state-owned lender a 2.2 billion-cedi bond.

The costs of dealing just with the collapsed banks could increase Ghana’s debt as a percentage of gross domestic product to 72.4 percent by the end of 2018, Moody’s Investors Service said this month, from 69.1 percent last year. Ghana’s cedi has weakened 2.8 percent against the dollar this year.

“It’s a huge debt burden,” said Courage Boti, an economist at Accra-based Databank Group. “It’s crisis management required to put the banking industry on a sound footing.”

©2018 Bloomberg L.P.