In this currency status report, I will discuss the negative and positive factors that are currently impacting the Ghanaian economy in plain language devoid of economic jargon as much as possible. The Ghanaian economy, especially its Cedi, has come under renewed pressure over the last few weeks I the global currency markets. So lets look at the key factors that are driving the Cedi’s recent depreciation. I have been receiving a slew of inquiries regarding the Cedi lately; so let me start with the adverse factors/negative shocks first:
Falling commodity prices [Gold]:
Almost six decades after independence, Ghana’s economy remains largely, a primary commodity exporter. And unfortunately, two of Ghana’s biggest foreign exchange earners Gold and Oil, have been experiencing declining prices on the global markets.
Gold’s recent accelerated decline is attributed to US Federal Reserve Interest increase. Being that gold is not an interest bearing asset, meaning that, if you buy gold and hold onto it, it will not yield any interest the same way if you bought US treasuries. Hence investors are more likely to pull their money out of gold and rather invest it in assets that will yield them higher returns on their investments thereby causing the global market prices of gold to slide even further.
It is important to note that this is outside the control of any government in Africa. And unfortunately, all of the global gold producers, Australia, South Africa, Ghana, are equally impacted from a revenue reduction standpoint. There is not much the Ghana government can do about this except maybe look into increasing revenues from alternative sources. I will cover the issue of revenue diversification in another article.
Falling commodity prices [Oil]:
Global prices of Oil have been falling for many months; this is largely due to an oversupply by Saudi Arabia in an attempt to force out ward of threats from new market entrants, i.e. Shale Oil producers in the US. But recently, this problem has been worsened even further, due to the fact that Iran just started pumping Oil back into the global supply chain after sanctions where lifted, thereby causing Oil prices to fall even further.
Because revenues from our major foreign exchange earners keeps shrinking, the government has been borrowing from both foreign and local markets in order to keep up with its recurring payments such as payroll payments of civil servants, etc. As a result, Ghana’s debt load is getting bigger and its deficits widening.
Ghana is currently running high twin deficits (current and fiscal account deficits). Our fiscal deficit is 8% of GDP, and current account deficit 10% of GDP. Ghana’s government debt is 65% of GDP as of 2014, versus 39% average debt to GDP ratio for other African economies. It is worth noting that, 67% of Ghana’s debt is external, highlighting vulnerability to higher US rates and a stronger USD. Tightening US monetary policy will increase borrowing costs and put further pressure on the Ghanaian economy going forward.
US Fed rate increases:
Over the last few weeks, rumors of the impending interest rate hikes have been causing considerable anxiety in the global markets. Especially in the emerging markets. Emerging markets are usually the last place investors invest and the first place they exit when the opportunity presents itself.
If the Fed should go ahead and increase interest rates in September, that mean that, investors will stand a chance of making better return on their investments if they relocate their funds to the US versus keeping them in the emerging market fixed assets where they are likely to receive lower yields.
In the last few weeks, there have been many reports of capital flight from the emerging markets back into the US and how that is affecting numerous currencies including the Cedi. This has been causing the cedi as well as many African currencies to depreciate further over the last few weeks to the runner-up of the rate hike. The governments of emerging market economies including Ghana have no hand in the sovereign decisions of the US Fed.
I will provide a link to a comprehensive report on this matter and what the Ghanaian government can do to mitigate the risks from this event.
Chinese Yuan devaluation:
The Chinese devalued their currency, the Yuan, in an attempt to re-boost their slowing economy. Being that china is currently the worlds biggest economy and also the biggest trade partner to many African countries including Ghana, this incident has subsequently caused considerable investor anxiety and a thaw in investment into the region, since many investor are taking a wait and see approach.
This means less investments going into African economies, which in turn puts emerging market currencies under depreciative pressures such as the one we are witnessing on the Cedi, amongst other things.
I will subsequently provide a link below to a comprehensive report on this subject and what the Ghanaian government can do in order to protect its interests against this global market risk.
Seasonality [increased importation by traders]:
Projecting a worst performance of the Cedi in the last quarter of the year. The Cedi has always had its worst decline in the last quarter of the year due to an escalation in import activity in the commercial sector due to the festive season. Importers have a huge demand for foreign goods they have to meet during this season, so naturally, demand for dollars will shoot up tremendously.
Profit repatriation by multi-nationals:
All these multi- national companies in the country always repatriate annual profits and dividends outside the country in the third and fourth quarters of the year. And that will certainly help drive the demand of dollars even higher.
The Good News
Producer Price Inflation (PPI) and CPI (Food) declined: For the first time in almost 24months, inflation rates for food and producer prices fell. I reported in my August Outlook report that, after almost two years of upward inflationary pressures, I expected us to begin to see a positive change in this trend soon as a result of the fiscal and monetary policies being implemented by the government in partnership with the IMF.
In my opinion, this is by far the clearest indication that that Ghanaian economy has turned a new leaf. Now, how fast we can climb our way back to double digit GDP growth figures is another thing altogether. But it is definitely obvious that glimmers of an economic recovery are finally beginning to show our economic horizon. I will provide links below to two detailed reports that I wrote on the subject of improving inflation figures.
Improved resistance to depreciation:
The local currency has recorded a slight gain against the US dollar when it closed trading on Saturday gaining Ȼ3.999 in value over the greenback. But that record was even better the following day when the cedi recorded a stunning 4.2 percent gain against its major trading partner to bring down the level of depreciation against the dollar to 20.4 percent from a peak of 26.2 percent on June 30.
Seasonal and Other Scheduled Inflows:
Expectations of the seasonal foreign exchange flows in the last quarter of the year will provide additional support to the currency. The mere anticipation of this positive economic event should serve as a psychological booster that should help improve both consumer and business sentiments in August.
Also, scheduled anticipated inflows of more than US$4 billion from the Eurobond issue, syndicated cocoa financing as well as other programmed inflows in the second half of the year will provide a strong buffer and help sustain stability in the foreign exchange markets as well.
Increased Donor Support:
Increased international Donor support for infrastructure related projects. A good example is the $700 million guarantee by the World Bank. The guarantees are expected to mobilize roughly $7.9 billion in new private investment for offshore natural gas, representing the biggest foreign direct investment in Ghana’s history.
Anang Tawiah is a New York City based Management Consultant specializing in Investment Risk and Technology Strategy. He continues to guide many Blue chip companies and Governments as a Business and Technology Consultant. Please direct all follow up questions, concerns, request for speaking engagements and presentations regarding my articles and research to my Facebook Page listed below. You can read more of his analysis or reach him for further professional consultations and or guidance on Facebook or on his website.