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.
Source: B&FT