The cedi remains relatively strong despite weak economic fundamentals, says market observers GCB Capital and Constant Capital.
Although the local unit has lost 4.4 percent against the US dollar as of March 28, the performance beats market expectations due to anticipated seasonality effects in Q1 2023 amid weaker foreign exchange reserve position and the highly bearish end to 2022, while the interbank reference rate has depreciated by 22 percent.
This is believed to result from efforts by the Bank of Ghana to tighten market spreads and quell speculation. Despite concerns over a weaker forex reserve position, export receipts have helped to drive a year on year (y/y) surplus for the merchandise trade account.
GCB Capital, in its report analysing the recent Monetary Policy Committee (MPC) decision to increase the policy rate by 150bps, suggested that limited trading activity on the Ghana Fixed Income Market [GFIM] has slowed down FX demand pressure from portfolio reversals – further supporting the cedi’s strength.
“We believe this surplus trade balance and the ongoing gold purchase programme have limited the rate of reserve depletion and sustained the central bank’s FX liquidity management efforts, on both the spot and forward market for build distributing companies,” GCB Capital said.
Additionally, the breakthrough in negotiations with China has brought the country closer to securing International Monetary Fund (IMF) Executive Board approval – with an official start of the IMF programme expected to unlock a balance of payment backstop for the cedi’s resilience in the second half of 2023.
“We believe the local unit’s near-term performance hinges on progress of Ghana’s external debt restructuring – including securing assurances from its bilateral creditors and capital market bondholders, as well as the delayed IMF Executive Board approval for an economic programme,” Constant Capital said.
Expressing a similar view, Apakan Securities mentioned that progress made on the local debt treatment alongside further engagements by government with its external creditors has improved market sentiments.
“After kicking off the year on a weaker foot against the US dollar and other major trading pairs, the local currency has regained its footing in recent weeks. This is primarily driven by the central bank’s continuous FX support on the market amid lower demand. Additionally, progress made on the local debt treatment with further engagements by government with its external creditors has improved market sentiments,” Apakan Securities said.
The market generally holds the view that the country’s breakthrough in negotiations with China has brought it closer to securing IMF Executive Board’s approval, which should unlock a balance of payment backstop – further supporting the cedi’s resilience through the second half of 2023. However, analysts noted that near-term performance of the local unit hinges on progress in Ghana’s external debt restructuring and securing assurances from its bilateral creditors and capital market bondholders.
“We believe the Ghanaian economy is facing significant challenges, but the resilience of the currency so far is positive news for investors,” said GCB Capital. “The currency’s strength will depend on progress in talks with creditors and the IMF, as well as efforts to manage liquidity and inflation.”
Although the Domestic Debt Exchange Programme (DDEP) has been less of a liquidity problem than expected, there have been solvency concerns for some commercial banks. The two percent reduction in the cash reserve ratio has led to excess liquidity in the interbank market, but banks have been cautious over loan book expansion due to uncertainties and heightened risks.
As a result, there has been a strong growth in broad money supply; which could be inflationary.
In response the MPC hiked the monetary policy rate by 150bps, which was seen as a surprise, as well as an additional measure of raising the cash reserve ratio (CRR) on domestic currency deposits from 12 percent to 14 percent, effective 13th April 2023.
GCB Capital suggests that the move signals commitment to sustaining a tight monetary policy stance until the disinflation process strengthens. However, this decision has trade-offs for growth and employment, particularly as the growth pulse has softened since second-half 2022.
“The decision has high trade-offs for growth and employment, particularly with the growth pulse softening considerably since 2H22,” GCB Capital added.
