Banks in sub-Saharan African countries, including Nigeria, faced risks associated with sovereign exposure throughout last year and will continue to do so even as these risks are expected to diminish over time, a report by Fitch Solutions has said. The report stated that during Covid-19, banks’ holdings of government debt and claims to the public sector surged as governments increased borrowing to fund additional expenditures, adding that with limited access to international markets owing to prohibitive costs, domestic banks became the main financiers.
It noted that this dependence posed significant risks to banks, particularly when government finances are strained. “This dependence poses significant risks to banks, particularly when government finances are strained. For instance, Ghana’s default on its domestic and external debt in December 2022 led to considerable losses for banks participating in its domestic debt exchange programme.
“Banking sectors in markets with elevated levels of government debt typically have the highest exposure to the government through loans or government securities holdings. We expect that the average debt-to-GDP ratio for the region will fall in the coming years, after peaking in 2023, boding well for our view that banks will reduce exposure to the sovereign,” the report said. It further stated that the reopening of Africa’s Eurobond market in 2024, following a hiatus of more than a year, marked a positive shift, with successful, oversubscribed bond issuances from countries such as Côte d’Ivoire, Benin, and Kenya.
This resurgence, it said, provided government with a source of financing other than banks, offering banks the opportunity to lessen their exposure to sovereign debt, potentially liberating resources for increased lending to the private sector. However, this transition is expected to be gradual, as loan quality continues to be a concern and private sectors present higher risk profiles than sovereigns.