GhanaMacroeconomic updateMulti-asset strategy

21 October 2022

When risk-free turns risky

In brief

  •  Recent market discussions point to a potential debt restructuring on “risk-free” assets which could involve haircuts on coupons, principal or both


  • In this report, we attempt to unpack the impact of the potential default on key sectors such as the banking, pensions and insurance industries under various scenarios


  • We also try to determine what the spillover effect could mean for the fiscal position


  • Overall, our simulations show that commercial banks, collective investment schemes, pension contributors and individuals are the most vulnerable group of investors, if loss events materialise


  • Banks could lose nearly GHS 8bn in the worst-case scenario (i.e. 15% haircut on principal + 30% haircut on coupons) with the potential to cause a recapitalisation of the sector yet again


  • Real returns on pension assets could remain negative yielding over the near-term in our base case scenario with the sector losing about GHS 1.3bn in the bear case scenario


  • While local investors may be forced to adopt any port-in-a-storm approach, we recommend hedging the currency through commodity-linked exchange-traded funds in the absence of U.S. dollar liquidity


  • We believe that at current levels, the market has priced in a significant amount of the negative press surrounding Ghanaian sovereign credit. An equal portfolio split between local and foreign currency bonds is likely to generate significant alpha post a bailout programme


  • Furthermore, we consider the short-end of the yield curve to be riskier. Consequently, we recommend swapping any short-term maturities for medium and long-dated bonds