A study conducted by Dr. Richmond Akwasi Atuahene and K.B. Frimpong has revealed that the that local bondholders will lose an estimated GH¢117.4billion on the back of the Domestic Debt Exchange Programme (DDEP).

The study analyzed the impact of Ghana’s Debt Exchange on the financial sector and real sectors of the economy by examining the net present value (NPV) of domestic bonds valued at GH¢432billion from various classes of holders, and concluded that the local bondholders will lose about GH¢117.4billion due to the DDEP, which seeks to address the country’s unsustainable fiscal situation.

“Data analyzed of debt exchange using the NPV of bond values of the Domestic banks, Bank of Ghana, Firms and Institutions, Foreign investors, Retail and Individuals, Insurance companies, SSNIT and Rural banks of GH¢431,962,821,245 showed the estimated losses of GH¢117,346,719,485 in (NPV) to local bondholders.”
Dr. Richmond Akwasi Atuahene and K.B. Frimpong

The losses were defined as percentage difference between the market value of the new instruments received by the investor and the NPV of the remaining contractual payments on the old instruments.

Banking Sector To Suffer

Unsurprisingly, the study established that the banking sector will be hit hard the most. With an overall NPV estimated losses of 58 percent, the banking sector is projected to lose an amounted of about GH¢67.88billion, “a major factor for determining capital needs of the banks,” the study disclosed

The study warned that the losses to various creditor groups could impact the banking sector and entire economy, including households and small and medium enterprises.

“This downward spiral will shut down domestic banks’ lending to businesses and companies as they lose all liquidity cash on hand needed to allow companies or businesses to continue with operations which can affect production and output, and as well negatively impact government domestic revenue generation. The local banks will suffer large economic losses when they exchange their existing debt for the new bonds with lower coupons and longer tenors.”
Dr. Richmond Akwasi Atuahene and K.B. Frimpong

It also emphasized that sovereign debt restructuring weakens domestic investors’ balance sheets, causing a contraction of credit and a decrease in output. This, it lamented, as the larger the exposure to domestic debt, the stronger the negative impact on the economy.

The debt exchange program, since its formation, has raised concerns among analysts and economists about its potential long-term effects on the economy. It is feared that the high losses for local bondholders could lead to a reduction in investment, which in turn would negatively impact economic growth and development.

DDEP Not The Solution To Ghana’s Problem, Adopt Economic Fiscal Structural Measures

In December 2022, government offered bondholders the opportunity to exchange GH¢137.3billion worth of domestic bonds for a package of 12 new bonds, with maturities ranging from 2027 to 2038 and coupon rates of 0 percent to 10.65 percent. The exchange was voluntary and bondholders had until January 2023 to participate, although it has been extended to the last day of this month.

Touching on the stop-gap nature of the measure, the study emphasized the need to address the root causes of Ghana’s unsustainable debt through structural reforms which improve fiscal management and address weak economic performance.

It further suggested that the debt exchange program’s design was not appropriate to address Ghana’s debt sustainability, and had a negative impact on the financial and real sectors of the economy.

“The high losses for local bondholders, in particular, indicate a need for further measures to address Ghana’s fiscal situation and protect the country’s economy from further instability.”
Dr. Richmond Akwasi Atuahene and K.B. Frimpong

The authors urged government to call for open and transparent engagement with the public and all stakeholders, including local bondholders and foreign investors.

“Government should also take steps to increase transparency and accountability in its fiscal management and debt operations. This will help to restore confidence in the economy and attract investment.”
Dr. Richmond Akwasi Atuahene and K.B. Frimpong