Phase 2 Of DDEP Had Minor Effect On Financial Stability Due To Lower Holdings Of Cocoa Bills And USD Bonds – BoG

The Bank of Ghana (BoG) has said Phase 2 of the Domestic Debt Exchange Program (DDEP) had a minimal impact on financial stability, primarily due to the lower levels of restructured Cocoa Bills and locally issued USD-denominated bonds held by the financial sector.

Unlike Phase 1, which caused significant impairment losses and weakened solvency ratios, Phase 2 of the Domestic Debt Exchange Program (DDEP) had a relatively minor impact on the financial sector, thanks to financial institutions having limited exposure to the restructured Cocoa Bills and USD-denominated bonds.

Phase 1, involving the restructuring of local currency Government of Ghana bonds, had placed heavy financial strain on the sector, leading to reduced profitability and substantial impairment losses.

However, with fewer holdings in the instruments restructured under Phase 2, financial institutions managed to avoid the severe financial damage seen in the earlier phase, allowing them to better withstand broader macroeconomic challenges.

According to the Bank of Ghana’s Financial Stability Review 2023, while the implementation of Phase 2 of the Domestic Debt Exchange Program (DDEP) had a relatively minimal impact on the financial sector, the broader economy experienced notable shifts.

The banking industry, in particular, demonstrated significant resilience. Despite the challenges posed by Phase 1 of the DDEP, which resulted in large impairment losses and reduced profitability, the banking sector’s assets grew by 29.7% to GH₵274.92 billion, largely driven by fresh deposits.

“Phase I which involved the restructuring of local currency GoG bonds adversely impacted the financial sector. This was reflected in the significant impairment losses, lower profitability, and reduced solvency ratios. Phase 2, however, reflected minimal impact as a result of the lower level of holdings of the restructured Cocoa Bills and locally issued USD-denominated bonds. In 2023, the banking industry experienced significant asset growth, increasing by 29.7 per cent to GH₵ 274.92 billion, mainly driven by fresh deposits. Despite this growth, assets as a share of GDP declined due to slower nominal GDP growth.” the review stated

However, assets as a share of GDP declined due to slower nominal GDP growth, reflecting the broader macroeconomic conditions. Although key capital indicators like the Capital Adequacy Ratio (CAR) and Tier 1 CAR declined due to impairment losses and rising non-performing loans (NPLs), which surged from 16.6% to 20.6%, operational efficiency improved.

Better interest margins and reduced non-interest expenses led to a strong rebound in profitability, with Return on Equity (ROE) recovering from -25.5% to 34.2%, and Return on Assets (ROA) increasing from -3.83% to 5.4% year-on-year. Liquidity remained robust, with broad liquid assets to total assets increasing to 65.7%.

The insurance industry also demonstrated resilience and progressive growth. Equity and assets in the insurance sector grew by 24% and 23.4% respectively in 2023, aided by regulatory strengthening, increased digitalization, and the rise of InsurTech firms supported by the National Insurance Commission (NIC). The NIC remains confident in the stability and future growth of the sector.

Furthermore, Ghana’s securities industry saw remarkable improvements in 2023, driven by stable macroeconomic conditions, disinflation, and a build-up in foreign exchange reserves. The Ghana Stock Exchange Composite Index (GSE-CI) achieved a 28% annual return, the fixed-income market experienced a 151% rise in debt instruments, and assets under management (AUM) saw a 38% increase. Initiatives such as the Commodity Aggregation Development Fund (CADeF) and the GCX Aggregation Support Scheme (GASS) contributed significantly to the market’s resilience and growth.

“Ghana’s securities industry improved due to relatively stable macroeconomic conditions, characterized by disinflation, and a build-up in foreign exchange reserves. This improvement was noted across the equities, debt and asset management segments, with the Ghana Stock Exchange Composite Index (GSE-CI).”

The Bank of Ghana highlighted that Phase 2 of the DDEP played a crucial role in the country’s efforts to restore debt sustainability. The financial sector’s resilience was strengthened through prudent management of asset exposures and the implementation of fiscal reforms aimed at reducing public debt levels.

Despite challenges such as rising non-performing loans and weakened capital ratios, the sector achieved significant gains in profitability, asset growth, and overall stability, laying a strong foundation for future progress.

Source:thehighstreetjournal.com