Cedi continues poor cycle in 2017

The poor record of the local currency in the last month of 2016 has persisted into the new year, displaying renewed fragility against the US dollar.

Backed by dollar inflows from the US$750 million Eurobond, an US$918 million IMF programme, and the US$1.8 billion cocoa syndicated loan, the cedi fared relatively well in 2016, except in December when it depreciated by 4 percent to end the year at 9.6 percent.

Mid-way through January, the cedi has so far lost more than 0.5 percent of its value against the greenback, prompting concerns that it could be in for a tough time this year.

Explaining the rapid fall of the cedi in the last month of 2016, Kisseih Antonio, Managing Director of Ecobank Capital, said there were a confluence of factors which led to the downward spiral.

“First was the uncertainty surrounding the elections; Ghanaians tend to flock to the dollar during periods of uncertainty as they find it a natural hedge to any downward movement of the cedi.

Second, the US Federal Reserve, owing to continued strength in the labor market, raised key short-term interest rates by 25bps, the second time in over a decade that it had done so. This led to a flight to less risky investments in the US market by several institutional investors and this adversely impacted exchange rate in emerging and frontier markets, Ghana being no exception,’ Mr. Antonio said.

At the start of December 2016, the cedi was exchanging at GH¢4.0322 to a dollar on the interbank market, but it ended the year at GH¢4.2275, confirming fears by analysts over its poor showing in election years.

As the Nana Addo Dankwa Akufo-Addo-led administration warms up into office, the successful change in government is expected to renew investor confidence, and lead to a respite for the local currency.

Mr. Antonio maintains, though, that regardless of change in government, some factors that accounted for the cedi’s poor showing still persist, and will continue to dampen the its performance.

“There is seasonal corporate demand for foreign exchange, starting from December and running to the first quarter to restock inventory and repatriate earnings of any given year. This leads to a downward pressure on the cedi,’ he said.

He adds that for the new government to succeed, it would have to focus on the country being self-sufficient in food production, that is, keeping food inflation under check, whilst adding value to traditional exports.

“We have had chronic depreciation of the cedi as far as I can remember and this is because of high import dependency, coupled with relatively low foreign exchange earnings from exports, which has led to a structural imbalance between USD supply and demand. Every senior secondary school economics student knows this, but we have only paid lip service to this in the last few decades. This is the time to make sure that the structural imbalance is addressed.”

The RMB Global Market Research, in its market update for the week, expects the cedi to trade sideways this week, maintaining a range of USD/GHS 4.23 – 4.27 as the market awaits any new pronouncements of policy, especially from the recently appointed Finance Minister, Ken Ofori-Atta.