Afreximbank Challenges Fitch’s Valuation on Ghana and Other Loans
Afreximbank, a financial institution supporting trade across Africa, has taken issue with valuation agency Fitch for presenting a misleading picture of its potential losses concerning loans in Ghana and other cash-strapped nations.
Last week, Fitch indicated that the Cairo-based lender risks around $2 billion in losses tied to loans to Ghana, Zambia, Malawi, and South Sudan unless these loans are managed as estimated creditors. According to Fitch, Afreximbank has been criticized for its “weak risk management policy,” which allegedly exploits the flexibility allowed under accounting standards to mark loans, thus increasing perceived solvency risk.
In response, Afreximbank claimed this week that it operates with “very high standards of financial transparency,” stating it has had difficulty adhering to international accounting standards and engaging in debt restructuring.
Concerns have intensified since a call on May 15, especially as Ghana notified bond investors about delays in payments. The Ghanaian Treasury later defended its stance, stating that despite not making payments to the bank for two years, “creditors are not being treated as a priority.” A letter from Ghana’s Treasury to Afreximbank indicated a willingness to discuss restructuring a $750 million loan after pausing long-term defaults.
The mounting tensions revolve around disagreements among creditors about whether Afreximbank functions like other multilateral institutions. Is it a development-focused lender offering low-interest loans, or does it seek high returns that involve significant risks? The director of research at the Ghanaian think tank Imani, Bright Simons, commented on the situation, noting that Afreximbank has become an influential entity in African capital markets but has lost some of its reputation for safety and stability.
Afreximbank, established in 1993 and backed by both African and non-African entities such as China’s Exim Bank, initially focused mainly on short-term trade finance, primarily serving private borrowers in countries like Nigeria and Egypt. However, its approach has shifted in the last decade, with a growing number of direct loans to governments, particularly those unable to access the global bond market due to high interest rates.
According to Afreximbank’s recent financial statements, only 2.3% of its loans were classified as non-performing at the end of last year. Nonetheless, Fitch contends that the actual rate exceeds 7%, reflecting significant exposure, especially from loans in Ghana.
Meanwhile, South Sudan has defaulted on its loans, which make up over 2% of Afreximbank’s assets. The bank had successfully sought to reclaim $650 million but did so while dealing with one of the world’s poorest nations that didn’t participate in the proceedings.
Fitch suggested that the ownership structure of Afreximbank may pressure it to boost lending at the risk of cautious growth. The agency recently downgraded the bank’s ratings, which could lead to losing its investment-grade status if the restructuring includes other lenders.
Those within Afreximbank and its supporters argue that its creditors rank alongside those of the IMF and World Bank, meaning there shouldn’t be losses during the restructuring. This week, the bank asserted it would not partake in the debt deal discussions. TDB, another trade-focused lender operating between East and South Africa, has supported this perspective in its dealings with Zambia.
However, some analysts express doubts about Afreximbank’s creditor status, questioning the relatively high interest rates on its loans and its reliance on private intermediaries, like banks that charge additional fees, which diverge from typical multilateral lending practices.
Last year, Afreximbank recorded profits close to $1 billion and paid nearly $320 million in dividends. It’s anticipated that its assets will reach $50 billion this year.
Ghana’s difficulties, particularly with its 2022 default on loans from Afreximbank, complicate efforts to restructure its debts. The country’s ongoing commitment to restructure $5 billion in debts and $13 billion in bonds has raised concerns about its treatment of creditors, particularly regarding priority contracts.
Chris Humphrey, a Development Finance Specialist, noted that prioritizing Afreximbank as a preferred creditor could lead other creditors to incur higher losses for loans considered questionable. Ghana faces a deadline by the end of the month to clarify whether it will honor commitments related to equitable treatment.
Humphrey further highlighted Afreximbank’s reluctance to adjust its stance on Ghana’s debt, contrasting it sharply with TDB’s response to Zambia’s past financial difficulties.
A downgrade to junk status would be detrimental for Afreximbank as it could alienate numerous investors, including insurance companies that typically avoid non-investment-grade securities. Approximately one-third of the bank’s funds are sourced from borrower deposits and cash reserves from African central banks, which are sensitive to credit ratings.
An investor mentioned that Afreximbank is facing a “mission creep,” indicating that if it continues to extend costly loans under precarious conditions, it will reflect in its financial standing.
