Investment analysts have downplayed any immediate impact that the increase in the United States benchmark interest rate by 0.25 per cent will have on the Ghana cedi should foreign investors react to the changes in the US economy.
“I don’t really see any significant exodus of capital from Ghana. What we are likely to see is a slowdown of fresh capital, where if they were investing US$50 million they may now invest US$40 million, at least for the medium term,” the Head of Investment Banking at Stanbic Bank, Mr Randolph Rodrigues, said in an interview.
On December 16, the United States Federal Reserve decided to raise its benchmark interest rate by 0.25 per cent, after seven years of leaving the rate at near zero. The rate will now hover between 0.25 per cent and 0.5 per cent.
The announcement will strengthen the U.S. dollar, with some foreign analysts predicting it will weaken just about every African currency, depending on how resilient and robust the economies are to external shocks.
Ghana is among the African countries with ballooning debt linked to global markets.
Federal Reserve Chair Janet Yellen said on December 16 that continuing economic growth and the improving labour market contributed to the U.S. central banks’s decision to lift the federal funds rate.
The widely anticipated move signaled the Fed’s confidence that the U.S. economy has significantly improved since the financial crisis of 2007-2008. The new benchmark rate is what commercial banks pay to borrow from the Fed.
Emerging markets analysts are predicting that Ghana, which has a debt-to-GDP ratio close to 70 per cent, may be worst hit.
“It’s likely going to affect currencies across the board in most countries, and in sub-Saharan Africa quite dramatically,” Ms Anna Rosenberg, has been quoted as saying. She is the practice leader for sub-Saharan Africa at Frontier Strategy Group, a global research and advisory firm in Washington that specialises in doing business in emerging markets.
She joins other such foreign analysts in predicting that the decision for the US to raise its benchmark interest would impact directly on African and emerging countries such as Ghana in several ways. This is because the hike could make investments in the US more attractive coupled with its better risk premium than elsewhere in Africa or emerging economies.
Impact on portfolio and real sector
There is the possibility for the decision to trigger the massive movement of investments in portfolio assets – treasury bills and bonds – to the US.
Ghana’s exposure to portfolio investors from offshore is about US$5 billion through the issue of local and international bonds. But what is certain is that investors will feed into their decision to commit new capital. A movement of investment from any economy back to the United States may cause currencies of those countries to depreciate.
“They may be asking for a premium on their investments if they still want to leave their money here,” a seasoned investment analyst in Ghana, who pleaded anonymity, suggested.
On the flip side, should they have a better opportunity to invest back in the US market, they could deploy funds back to that market.
“This will create a shortage of capital flow, both for direct investments in the real sector and also for portfolio investments – government bonds, other government securities and so on.”
The analyst, however, believes that the impact on fresh capital inflow might be immediate, because existing investors would consider the cost of unwinding. The incremental benefits of either keeping them until maturity or immediate pull-out are key in reaching decisions on this.
While Mr Rodrigues agrees generally with those assertions, he expects only a marginal squeeze in any fresh capital because there were some funds specifically earmarked for investments in Africa and other emerging economies for the purposes of diversifying. This could offset any threats of sharp shortages in fresh capital inflows that may be envisaged.
‘The largest single institutional investor in Ghana has about US$2 billion investment in securities. This investment is a small bit in their portfolios. They also have a mandate to invest in emerging markets and African economies and, therefore, it is not likely they will pull out their investments anytime soon,” he pointed out.
Real sector investments
Mr Rodrigues doesn’t also see a significant impact in the real sector, particularly the real estate sub-sector. This is because these are mainly private equity and pension funds which are focused on Ghana as part of their Africa exclusive focus.
Again, the Ghana real estate market has a huge deficit which makes investing here prudent, another incentive to continue to invest in Ghana nevertheless.
Impact on currency
The domestic analysts converged on the theoretical fact that the cedi could depreciate should investors decide to move their funds immediately. But they believe that action may be moderated by a high possibility that the portfolio investors may hold back the evacuation of funds, given that the 0.25 per cent was not so substantial.
However small the Fed benchmark rate hike, the analyst maintained it signalled a renewed rising trend in the Fed rates.
“The reversal may signal that the downward trend had reached the bottom and the rate had started to rise. For those making medium-term decisions to invest in Africa or any in the emerging economies, they will consider the opportunity cost of holding the funds outside the US market which may be rising anytime they raise the rate in the US,” the analyst stated.
The analysts added; “It is more likely to be neutral depreciation. This means it could make depreciation of the currency flat.”
Banking sector
The Fed decision’s effect on the local banking sector could be two-fold. While it could make the cost of borrowing by banks from the US economy or dollar-denominated funds for on-lending expensive, it also affords them the opportunity to invest their excess dollars offshore for higher returns and diversification.
“The banking sector too relies on international banks to borrow dollars for on-lending in the local market and this rise will also impact their dollar borrowing cost. Therefore, the impact will just not be on the government,” the analyst explained. The implication is that it might affect banks’ lending to corporate clients such as those in the real estate and manufacturing sectors.
But Mr Rodrigues said that was less of an issue because there so much capital moving around.
“To my mind, I think the theoretical impact is much bigger than the real impact, given that Ghana’s economy is much smaller, irrespective of how exposed it may be to global investors,” he stated.
Way forward
The country can mitigate the effects significantly if they continue to improve on risk management and be prepared to pay a price – premium on investments.
The economic fundamentals should be sound to send confidence to the market that although the US market may be picking up, it is worth keeping their capital here.
Mr Rodrigues believes the government is on course doing the prudent things that would boost investor confidence. These include the change in borrowing, ring-fencing projects to ensure they pay for themselves as well as changing the tenor of indebtedness such as the issuance of longer tenor instruments and bonds and shifting from short term contracts such as 91-day treasury bills to ensure more planning.
However, “it doesn’t help that every month there is a new scandal around mismanagement of public finances. Either than that, they are supposedly doing the right things,” he stated.
Background
Investors look out for a range of instruments such as equities, debts, bonds, private estate and equities, across currencies and across geographical areas such as China, Africa, or US treasuries.
They carry out these investments using the UK three-months London Interbank Offer Rate (LIBOR) or the US Fed rate as a benchmark for their investments. When these benchmark rates are high, it denotes that the cost of borrowing, as well as investments in that market, will be high.
The reverse is when the cost of borrowing and investment yields become low with lower benchmark rates.
Source: Graphic