Phase 2 of DDEP had low impact on 2023 financial performance – BoG
Phase two of Ghana’s Domestic Debt Exchange Programme (DDEP) has had a moderate impact on the 2023 audited financial performance of local banks, according to the Bank of Ghana’s 2024 Financial Stability Review.
This relatively limited effect on banks is attributed to lower levels of debt holdings involved in the second phase and more favourable restructuring terms negotiated by the government.
The report emphasizes that proactive measures, including earlier impairments booked by banks in 2022, allowed for a stronger-than-expected financial rebound in 2023.
In August 2023, the Government of Ghana negotiated and restructured pension funds holding bonds worth GHS 30.01 billion under separate arrangements.
This restructuring was critical to easing financial pressure on the pension sector while alleviating the potential for excessive financial instability within the banking sector.
The DDEP Phase 2 specifically targeted the restructuring of Cocoa Bills, valued at GH¢8.1 billion, and locally issued US dollar-denominated bonds totalling $808.99 million.
With these adjustments, the government achieved greater fiscal flexibility and a slight reduction in the debt-to-Gross Domestic Product (GDP) ratio.
However, looking ahead, the Bank of Ghana report warned that external debt restructuring, especially regarding Eurobonds, may impact the financial stability of banks and other institutions with further impairments. This could arise as Ghana pursues agreements to restructure its external debt, which remains critical to achieving long-term debt sustainability and restoring investor confidence.
To shield the financial sector from potential adverse effects of debt restructuring, the report highlights several regulatory measures:
- Regulatory Reliefs and Recapitalization: Financial regulators introduced relief measures to cushion banks from the immediate impacts of the debt restructuring. Recapitalization plans are also underway, with the establishment of the Ghana Financial Stability Fund, aimed at providing liquidity support to banks and other financial institutions affected by the debt restructuring.
- Financial Sector Strengthening Strategy (FSSS): Developed in 2023, the FSSS aims to streamline regulatory responses across the financial sector. This coordinated approach enables timely identification and mitigation of emerging risks, ensuring that financial stability is maintained through a collaborative regulatory framework.
These policy interventions are designed to protect the banking sector’s resilience as the government works to resolve the national debt burden. In particular, the Ghana Financial Stability Fund is expected to provide essential support, helping banks and financial institutions absorb potential losses and maintain credit extension to the real economy.
Phase 2 of the DDEP underscores the government’s strategic approach to addressing its debt sustainability challenges while managing the short-term impacts on the banking sector. As the external debt restructuring phase unfolds, the government’s fiscal strategy, including the shift towards value-added exports and revenue generation, is pivotal to maintaining economic stability and supporting growth. The Bank of Ghana report reiterates that the ongoing DDEP restructuring has opened up fiscal space for the government to address pressing needs, contributing to efforts to lower the overall debt-to-GDP ratio. This restructuring marks a significant milestone in Ghana’s journey toward economic stability, focusing on minimizing impacts on the financial sector while achieving sustainable debt levels in the long term.
