The cedi’s rising fortunes
Ghana's national currency, the cedi is on the brink of completing a record-breaking year, and even the currency analysts that have spent most of the year predicting an end to its new found stability, now almost unanimously agree that it is unlikely that the exchange rate will not significantly breach the GH¢4.0 to US$1.0 level by the end of the year.
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“The cedi can be expected to remain stable through the election period and up to the end of the year and beyond,” Edem Akpenyo, an Analyst at FirstBanc Financial Services (an investment banking and asset management firm) gave the assurance. “It is highly unlikely that the cedi will experience any significant depreciation over the next two months,” he added.
The new conventional wisdom is in stark contrast to the one that ruled a few months ago. Even as recently as late July this year, currency analysts were fretting over the possibility of renewed cedi depreciation despite the fact that it had only fallen by four per cent against the US dollar over the previous 12 months.
The worry at the time was that almost three quarters of that depreciation had come between May and the end of July following the delay by the Executive Board of the International Monetary Fund to formally endorse Ghana’s performance under the ongoing Extended Credit Facility programme, which aims to restore the country’s macro-economic stability. This had made the local foreign exchange market jittery, not just because it meant a delay in the disbursement of almost US$120 million in balance of payments support, but it also raised questions about Ghana’s overall performance and the consequent willingness of foreign donors and investors to provide more direly needed forex.
Forex markets
Since September, however, the endorsement has been provided and the balance of payments support given restoring confidence in the forex markets again. This has been accompanied by substantial forex inflows, most notably this year’s edition of the annual pre-export finance facility for cocoa, which provided US$1.8 billion (and a commitment by the lending consortium of banks to provide a further US$200 million if required) and US$750 million in proceeds from the latest issue of Eurobonds on the international capital markets.
All this has made the Bank of Ghana (BoG) Governor, Dr Abdul-Nashiru Isshahaku, justifiably supremely confident that the cedi will hold its own through to the end of the year - even with the general election pending – and indeed well beyond.
“The cedi is expected to remain stable and this is largely due to a number of measures introduced by the BoG,” he gave an assurance. “In particular, the bank’s recently introduced policy of surrendering export proceeds to commercial banks will help to increase supply of foreign exchange at a high level and that is easing pressure on the cedi. In addition, the cocoa pre-export finance facility has also increased the supply of foreign exchange in the interbank forex market,” he added.
Dr Isshahaku adds: “The tight monetary stance and recent issuance of Eurobonds has also boosted reserves and improved liquidity in the forex market, and is supporting disinflation over the forecast horizon.”
Forecasts
All these have turned earlier, more pessimistic forecasts on their head. For instance, in mid-July, London-based Ecobank Research released its Ghana Economic Strategic Report for the third quarter of 2016, which contained a forecast that the exchange rate was expected to depreciate to between GH¢3.97 and GH¢4.10 against the US dollar over the remaining two months of the third quarter. It was only by mid-November, however, as it turns out, that the exchange rate reached the lower end of that range and it is highly unlikely that the upper range would be reached before well into 2017.
Not everybody got it so wrong, though. Highly respected international analysts, Trading Economics were much more conservative, forecasting an exchange rate of GH¢3.98 by the end of the third quarter and GH¢4.02 by the end of the year. But the cedi’s resilience makes even this overly pessimistic.
Lessons
Several important lessons have been learnt from the way the forex market has worked in the past couple of years.
One is that speculative demand for forex by people taking up trading positions against the cedi in search of profits has been far more responsible for the currency’s sharp depreciation in the past than economic fundamentals have been, even when those fundamentals have been deteriorating. Actually, it was the recognition of this that persuaded the BoG to introduce emergency measures in early 2014, aimed at curbing demand for forex that was not based on actual immediate needs for transactions.
However, this failed because at that time, the BoG had not learnt another, equally important lesson: that confidence among forex traders and end users in Ghana is the single most important factor that influences forex market behaviour. Consequently, forex traders and end users saw the introduction of emergency regulations as a reason to panic, and therefore, stock up forex by circumventing the regulations, which they did quite successfully.
Having learnt that lesson, the BoG has since changed its strategy, prioritising the enhancement of confidence in the availability of supply on the market. This is why it has been willing to intervene in the market since 2015, beefing up the supply of forex from its own cache. This, in turn has reduced, if not completely eliminated the urge by forex traders and end users to buy forex to hold against the possibility of a rainy day.
Actually, since the BoG began its forex market reforms on July 1, this year; it has lost some of its capacity to intervene because it now receives less of the total forex generated by exports than it used to. However, by leaving more of such export revenues to be held and traded directly by commercial banks, the need for such central bank interventions has diminished greatly.
The reversal of the trend in Ghana’s local forex market with regard to both availability and exchange rate shows up most clearly in the behaviour of forex account holders. In the one year up to May 2015, the volume of foreign currency deposits held by banks in Ghana grew by 59.7 per cent , as account holders responded to the cedi’s sharp fall in value against the major international trading currencies. However, since the cedi’s resurgence in mid-2015, this growth first slowed, and over the past six months, has reversed itself. The proportion of total deposits held by the banks as foreign currency deposits is now declining rapidly as the cedi holds its own against those major international trading currencies and cedi denominated financial instruments offer far better interest yields.
If currency speculators opt to stick with their old strategies for making money out of the cedi’s depreciation, they will certainly get their fingers burnt as they did in the second half of last year when the currency surged upwards in dramatic fashion for a couple of months. Considering the damage they have done in recent years, and their potential for more harm if given the chance, few in Ghana will weep if they lose their shirts altogether.