Credit risk remains high—S&P

Ratings agency, S&P Global – the parent company of Standard & Poor’s Financial Services LLC – has warned that credit risk within the country’s banking sector remains high.

The American-based ratings agency, in its outlook for the economy published on Friday, said the credit risk is reflected by improving but still-high levels of non-performing loans (NPLs), at about 23% of total loans in June 2018.

“Government’s Energy Sector Levy Act (ESLA) could help resolve some of the bank asset quality issues. Bank lending to energy sector state-owned enterprises (SOEs) accounts for a large part of the banking system NPLs.

“Under the ESLA Bond Programme, a special-purpose vehicle (SPV) will enter into agreements with relevant SOEs’ creditors – under which the legacy debts will either be repaid in cash from proceeds of the bond issuances, or be settled through debt-swap transactions. In swap transactions, the legacy debt will be traded directly for bonds issued under the programme,” the report noted.

The banking sector’s impairment provision to gross loans and advances has deteriorated from 8.6 percent at end of 2016 to 10.7 percent as at end of 2017, notwithstanding the measures taken by banks to improve asset quality in 2017.

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The banks’ tightening of their credit stance in response to high credit risk has led to a significant decline in interest income from loans and advances.

The industry’s net interest income grew by 6 percent from GH¢6.1billion in 2016 to GH¢6.5billion in 2017, which is slower than the 14 percent growth rate achieved in 2016.

A recent PwC survey of the banking sector noted that the tightened credit stance on loans is as a result of the increase in defaults. Non-performing loans (NPLs) constituted 19.7 percent of gross loans and advances as at the end of December 2017.

“For the first time in the last five years, the industry witnessed a dip in its loans and advances. Industry loans and advances fell by GH¢3billion – representing a 10 percent drop from 2016 despite a decline in banking industry average base rate from 25.5 percent in 2016 to 20 percent in 2017,” PwC noted in its survey.

Weak fiscal accounts

In S&P’s latest country-specific analysis, Ghana’s credit rating was raised to ‘B’ on improved monetary policy effectiveness.

“Ghana’s improving banking sector stability and lower inflation support our view that the effectiveness and transmission mechanism of its monetary policy have improved. We are therefore raising our long-term ratings on Ghana to ‘B’ from ‘B-‘. We are affirming the short-term foreign and local currency sovereign credit ratings at ‘B’. The outlook is stable,” S&P’s noted.

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Despite the improvement in effectiveness of monetary policy, the rating agency warned that fiscal accounts remain weak.

“Reduced inflationary pressures and broad alignment of money market interest rates with the BoG’s policy rate indicate improved monetary policy effectiveness, in our view.”

The report adds that: “Ghana’s public finances remain weak from both a stock and flow perspective. Government has limited room to manoeuvre. Both revenue mobilisation and expenditure control are essential for government to keep firmly on the consolidation path.

“We expect external debt to exceed external liquid assets by about 135% of current account receipts (CARs) on average over 2018-2021, and gross external financing needs to average about 120% of CARs plus usable reserves.”

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