Ideas & Debate

Ghana shows why lenders needn’t trust state blindly

fuel

Petroleum Ghana’s decision to guarantee loans in the energy sector failed leaving banks with gaping holes in their balance sheets. FILE PHOTO | NMG

Last week, I told you how Zimbabwe offered a second lesson to the rest of sub-Saharan Africa on how to successfully plough down mountains of banking sector bad loans.

Today, we are moving to Ghana to learn how banks shouldn’t place excessive trust on government undertakings.

This week, Ghana’s central bank, Bank of Ghana, took over two banks, namely UTBank and Capital Bank. The former was a Tier II and the latter Tier III.

The move only offered a sneak-preview of the depth of loans non-perfomance in Ghana. Indeed, by close of May 2017, 22 per cent of loans were non-performing. That’s pretty steep.

But how did they end up here? Everything is traceable to the energy sector. For a time, the government ran a two-pronged sector subsidy whose main aim was to insulate households from exorbitant prices.

First, state-owned hydro-power producer (Volta River Authority) sold subsidised power to state-owned distributor (Electricity Company of Ghana). Government would absorb both the resale price subsidies as well as exchange rate pass-through. It in turn would issue payment undertakings.

For several months, these were not honoured. Obviously these entities would record revenue shortfalls but because parastatals do not qualify for budgetary support, they would have to bridge their working capital gaps through borrowings from commercial banks. The loans were secured by payment undertakings from the government. Big mistake.

Second, after the de-regulation of Ghana’s downstream, petroleum sector, distribution of refined petroleum products was no longer the preserve of state-owned refinery (Tema Oil Refinery). The refinery was also facing capacity issues, occasioned by prolonged mismanagement. From the tales of our own Kenya Petroleum Refinery, this is a very familiar story.

In its place, new privately owned distributors, known as Bulk Oil Distributors (BDCs), emerged—with a core mandate to import refined petroleum products in bulk and distribute to oil marketers. However, they were also subject to the subsidy programme to the extent that the government gave them two undertakings: first, the subsidy portion of the price would be reimbursed.

Second, because of the fluidity in exchange movements from the time a BDC places an order to the time the products arrive, the government would absorb any exchange rate pass-through.

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On the strength of these undertakings, the BDCs would approach commercial banks to finance product importation. Another big mistake.

For the medium-sized and smaller banks, this was a business gravy-train. They saw no need to pursue other risks.

At its peak, in 2015, energy-sector related loans accounted for 40 per cent of total outstanding loans—which represented significant concentration risks for the banking sector. And then the chicken started coming home to roost.

Government failed to honour its payments for several months.

Meanwhile, banks started migrating BDC exposures from off-balance sheet to on-balance sheet, in the hope that some miracle would crystallise.

By the close of 2016, 40 per cent of energy sector related loans were non-performing—or half industry dud loans.

Big lesson to banks; do not blindly trust government undertakings.