Ghana’a power failure

EUROMONEY MAGAZINE

MAY 2017

The country’s last administration borrowed heavily from banks to sustain inefficient state-owned energy companies at the expense of the private sector – can the newly elected government repay the debt and get banks lending again?

March 6 marked 60 years of independence in Ghana. In Accra, Ghana’s capital city, thousands of people took to the streets in celebration. Ghana’s bright green, yellow and red flags adorned every building, street sign and tree. The celebrations also reflected a sense of optimism in Ghana after the election in December 2016 of Nana Akufo-Addo, leader of the New Patriotic Party (NPP), as president and the defeat of John Mahama of the National Democratic Congress (NDC). 

It was Akufo-Addo’s third attempt at the presidency. His persistence had paid off.

But Ghana’s optimism will only last if it is accompanied with economic change. Akufo-Addo pledged a shift in direction for Ghanaians struggling with higher taxes, power shortages and rising living costs that brought GDP growth in Ghana down to 3.6% in 2016 – the lowest in two decades. As one stallholder in Accra tells Euromoney: “No matter how great democracy is, it doesn’t put food on the table.”

“Being independent means you have the freedom and ability to make informed decisions in life without having to ask other people for permission,” said Akufo-Addo in a speech delivered during the Independence Day celebrations. This sentiment is central to the new administration’s economic direction: a promise to empower the Ghanaian people and the private sector to drive economic growth.

This will be no easy feat. The private sector has long been ignored by banks in favour of safer government debt and treasury bills. At the same time, in an effort to curb inflation, interest rates are among the highest in sub-Saharan Africa. “The cost of credit in Ghana is staggeringly high, at around 30%,” says Derrick Mensah, senior analyst at African Alliance based in Accra. “A lot of private companies in Ghana can’t really afford this.”

Sionle Yeo, managing director at Société Générale, Ghana, agrees: “Banks want to lend more to the private sector, but it is difficult because interest rates are so high. Some companies come to us with unrealistic business plans that don’t stand up to stress tests because of high interest rates. For now, these projects just aren’t bankable.”

The borrowers

Over the last decade, the government in Ghana borrowed heavily from the banks to prop up state-owned enterprises (SOEs) in the energy sector. The banks obliged. Four SOEs were the heaviest borrowers – the Volta River Authority (VRA), Ghana’s main electricity supplier; the Tema Oil Refinery (TOR); the Electricity Company of Ghana; and transmission utility GridCo. The VRA and TOR depend on imported crude oil to function.

Ghana’s bulk distribution companies (BDCs), private companies licensed by the government since 2006 to buy and sell petroleum products, also borrowed heavily from the banks on the premise that the government would pay any foreign exchange shortfalls involved. Banks also supported the BDCs by providing letters of credit. The BDCs were supposed to be a tool to control capital flight in the oil and gas sector – an industry that has long been dominated by international companies that repatriated profits offshore.

But problems started to arise in 2009 when the government’s own oil distribution company and oil storage and transportation company began to compete directly with the BDCs. 

“BDC’s were forced to cut prices in return so that they didn’t lose customers, and debts mounted,” says the head of business development at an infrastructure investment company in Ghana. 

Mismanagement in the energy sector was supposedly rife. “Some of the SOEs are led by government officials that don’t really understand the sector,” says one local energy developer.

“Very little was invested in capital expenditure and they were largely inefficient.”

The developer recalls stories of collusion between local oil companies and authorities. “They keep the oil offshore and away from the ports for longer than needed. And for each day the oil isn’t delivered, there’s a demurrage fee for Ghanaian importers – a charge for the delay,” he says.

According to data from the IMF, SOEs in Ghana and the energy sector in particular accounted for combined losses of 1.8% of GDP and gross liabilities of 13.7% of GDP in 2015. Ghana’s energy sector debt reached a staggering $3 billion; $2.4 billion from the SOEs and $0.6 billion from the BDCs. 

Eventually, power production became unsustainable and from 2009, blackouts became common. Ghana often had only five hours of power a day. Locals called the power outages ‘dumsor’ meaning ‘off and on’ in Akan, a Ghanaian dialect. President Mahama was nicknamed ‘Mr Dumsor’ because of his government’s failure to address the crisis. Taxes were continually increased to try and support the energy sector and the budget. 

“We were importing so much crude as well as so many other goods, the currency lost value and inflation began to creep up,” says Raymond Amanfu, head of the banking supervision department of the Bank of Ghana. Headline inflation has been rising since 2011, hitting 19.2% in March 2016, before falling back to 15.4% by December. The value of the Ghanaian cedi has fallen since 2011, losing 9.6% against the dollar last year. 

The BDCs were in bad shape. As big importers of oil and gas, much of their liabilities were in dollars. Government promises to offset any foreign exchange losses for the BDCs were not kept. With the depreciation of the cedi, servicing debt became near impossible and many companies closed down.

“To keep afloat, our company had to come up with some really innovative financing solutions together with the banks,” says the head of business development at an infrastructure company. “We were lucky. But for some companies, banks were just not interested. They even stopped providing hedging products because the risk was just too high for them.”

In June 2016, Ghana’s energy sector was dealt a blow. Following an unpaid bill of $180 million to Nigeria’s West African Gas Pipeline, Nigeria cut off Ghana’s crude oil supply. To produce electricity, Ghana’s SOEs began importing even more expensive crude under direction from the government. Total crude oil imports for 2016 amounted to $1.76 billion. 

“If the SOEs as part of the state could afford to buy such expensive crude, I have no idea why they didn’t just pay the debt to Nigeria in the first place,” says Yeo. 

In 2015, with economic pressures mounting and Ghana unable to bring spending under control, the IMF was called in. Under an extended credit facility programme, the government was directed to remove fuel subsidies and bring its wage bill under control. Commitment, however, was lacking.

“Regardless of what the last administration said, fuel prices in Ghana are often kept artificially low,” says the infrastructure development head. The reason? “Probably to curry favour among the electorate in the run up to previous elections.” 

This time, it obviously failed to work. 

'Refinancing debt'

Ghana has been active in the international capital markets since its debut Eurobond in 2007. Most recently, the country raised $750 million with a yield of 9.25% in September 2016. Despite the risk-averse sentiments towards many emerging markets, the bond was five times oversubscribed. 

“Looking at the last issue, yields were pretty attractive,” says Sam Ankrah, CEO at Africa Investment Group based in Accra. “But unfortunately, as has been the case in the past, little of this is turned into productive capital and is usually just used to refinance debt.”

Some observers believe that proceeds from Ghana’s previous Eurobonds were used to pay public-sector wage bills – another policy introduced in the run up to the 2012 elections to get the electorate on side. In the first half of 2016, the government had already spent 58% of its full-year budget on the state payroll. 

Lacking fiscal resources, the NDC administration failed to pay the banks back, while a tight monetary policy to tackle inflation kept interest rates in the banking sector high. Whatever space the banks had to lend to the private sector was squeezed. As Ghana’s newly appointed minister of finance Ken Ofori-Atta explained in the budget speech on March 2, private-sector credit growth was 14.4% year on year, against 24.5% recorded in 2015. In real terms, private-sector credit actually contracted by 0.8% in December 2016, compared with a growth of 5.8% a year earlier.

The banks’ non-performing loans rose dramatically. According to data from the Central Bank of Ghana, NPLs reached C6.1 billion ($1.46 billion) in July 2016, a ratio of 19.1%, up 70% over the year. In the same time, the proportion of banks’ NPLs attributed to the public sector increased from 2.2% to 14.2%. The NPL ratio had fallen to 17.4% in December.

“NPLs in Ghana are very high,” says Akintunde Majekodunmi, sub-Saharan Africa bank analyst at ratings agency Moody’s. “Nigeria, which is facing its own challenges in the banking sector, has an average NPL ratio around 12%. Ghana’s is significantly higher.”

NPL worry

For some banks, NPLs reached worrying levels. Standard Chartered’s ratio reached 43.4% in 2015, up from 27.4% a year earlier; Barclays edged up to 36.8% from 35%; Ecobank, the largest bank in Ghana, hit 18% from 1.8%; and Guarantee Trust Bank, 23.5% from 13.3%. All have high exposures to Ghana’s energy SOEs.

“Without VRA debt, we calculate that the NPL ratio for the banking sector in Ghana would be around 3%,” says a senior banker at a local bank. “The VRA owed us C120 million alone.” He says that his bank’s NPL ratio reached around 14% last year, but has now come down to around 10%. “We saw some of the distress signals in the system about three or four years ago and began to deliberately reduce our exposure. The situation could have been a lot worse for us.”

Nearly all of Ghana’s 33 banks are exposed to the energy sector. “Initially the banking industry wanted to take action together, to team together and go to the government for a solution,” says the senior banker. “But it wasn’t that easy. There was a split between the banks – between secured and unsecured lending, which meant that the pressures were completely different. No one really wanted to own up to how exposed they really were.” 

“You could see it in the numbers,” says a local analyst. “Some banks – generally the local mid- to lower-tier banks – didn’t have high NPLs on their balance sheet, but we knew that they were much more exposed then their books showed.” There was some speculation that the ministry of finance had told them not to record government debt on their books, while the larger international banks had to report to a parent, hence the discrepancy.

Alhassan Andani, CEO at Stanbic Bank in Ghana, believes the discrepancies in NPLs were probably just down to timing and when NPLs were recorded. “Neither the ministry of finance nor the central bank would have asked any bank to edit out government debt from their balance sheets. The levels of provisions made by different banks on the same impaired loans to the same counterparties come down to internal credit governance and enforcement standards,” he says.

Eventually, two audits by Ghana’s central bank in May 2015 and then again in June 2016 brought to light the size of the problem. “NPLs were rising and we could see that bank capital was constrained,” says Amanfu. Eventually the government stepped in. In 2015, the Energy Sector Levies Act (ESLA) was enacted to claw back some of the money owed to the banks by raising a small tax on all petroleum sales that would be used to pay off the debt. 

Much of the debt was restructured to reduce interest payments and foreign currency pressures. Akufo-Addo’s government has expressed its intention to keep the act in place. In the case of VRA, a total of C2.2 billion, around half of the debt it owed, was restructured. For TOR, it was C0.9 billion. The new administration is looking to see if ESLA can also help repay some of the debt owed to the BDCs.

In 2016, the act pulled in C3.3 billion, slightly higher than the target of C3.2 billion. But not all the proceeds have been accounted for. “It’s recently come to light in the budget that not all the money raised was used to stabilize the energy sector,” says Yeo at Société Générale. “The hope is that the new administration will bring a level of transparency to the whole system. Ghanaians won’t put up with such low levels of accountability anymore.” 

With stronger accounting standards, debt restructuring and lower interest rates, the ESLA could pay off energy sector debt – principal and interest – within the three years. ESLA, however, was signed in to law for 10 years by Mahama’s government. “Unfortunately, I think this is because the previous administration was making room for probable slippages,” says the local analyst.

“The problems in the banking sector were a direct result of mismanagement by the government and poor supervision on the part of the central bank in not supervising loan books of banks appropriately,” says Ankrah at Africa Investment Group. “I believe it had everything to do with the NDC’s downfall. Businesses were collapsing, energy companies were run to the ground. And in the end, it took the government too long to take action.”

The local energy developer says: “The government didn’t have enough cash to pay back the loans and I don’t think they really planned to. With such little room for manoeuvre, the government used any cash they had to fund the budget deficit. They were just taking the banks out of the equation to try and make their lives easier.”

Confidence

So far, ESLA seems to be working. All the banks that Euromoney spoke to had received payments on time and in full. When financial data for 2016 for the banking sector becomes available, analysts and bankers alike predict that NPL ratios will show falls and banks will be in a much better position to lend. 

Confidence in the new administration has also had some positive side effects on Ghana’s economy. “Inflation has come down and Eurobond yields have tightened slightly,” says Amanfu. 

Treasury bill interest rates in Ghana have also fallen on the back of declining inflation. In December alone, 91-day and 182-day interest-rate equivalents dropped by 604 and 620 basis points respectively. In mid March, 91-day T-bill rates were 16.4%. The hope is that this will have a positive effect on interest rates in the banking sector and will encourage new businesses to borrow. 

But so far, the fall in treasury bill rates has not had the desired effect. “It’s not going to be straightforward,” says George Bodo, head of banking research at Ecobank. 

“Firstly, we are seeing a sustained negative divergence between treasury bills and overnight interbank rates, which represent banks’ liquidity and hence the funding environment. Usually these two pricing benchmarks need to align to ensure transmission efficacy. Moreover, the significant economic issues around the electricity crisis and low commodity [price] environment are still taking its toll on the economy. I predict inflation rates will still remain quite high throughout 2017.”

But for Andani at Stanbic there is still the potential for change: “There has been some stickiness in the system, but we hope that the lending rate of banks will trend down in tandem with the treasury bill rates, which will make it easier for the private sector to borrow.”

In the medium term, banking-sector reform will also help support private-sector credit. As well as the introduction of Basel II recommendations more generally, Ghana’s central bank has discussed raising minimum capital requirements from C120 million to around C300 million. The change should come into law soon. Henry Oroh, Zenith Bank

“Higher capital requirements will lead to consolidation in the banking sector,” says Henry Oroh, CEO of Zenith Bank in Ghana. “It’s too early to say what the sector will look like, but it will probably cut the number of banks in the system by half.” Fewer but stronger banks in Ghana will be able to support larger ticket transactions, absorb shocks and keep NPLs low. Consolidation will also have the added benefit of improving corporate governance, believes Oroh. 

Despite the economic and banking challenges, international investors are showing interest in Ghana. According to the Ghana Investment Promotion Council, there have been 60% more inquiries about investment opportunities in Ghana over last year. Recently, delegates from both the UK and France have expressed interest in deepening investment ties with Ghana. The hope is that some of this investment will make its way into the private sector.

“After a long time, we now have some confidence in the system and the government,” says the local developer. “In the private sector and as a Ghanaian citizen, we finally have hope – something we have been lacking for the last eight years. Things for Ghana are looking up.”