Global leader in financial services and US firm, JP Morgan has warned that the likely restructuring of Ghana’s debt would further weaken the Ghana cedi, even if an increase in Foreign Exchange Forward Auction sizes or reversal of the foreign exchange (FX) purchase policy results in short-term respite for the cedi.
One of the causes of the Ghana cedi’s declining value, according to the Emerging Market Quick Take on the currency’s performance, is the Bank of Ghana’s decision to buy dollars from mining and oil companies, which unintentionally reduced the amount of foreign exchange available on the interbank market.
It further claimed that despite relatively modest portfolio outflows, the decline in confidence on the domestic front has caused a sizable drain on the financial account.
“The cedi has now weakened by around 60% against the US dollar this year, as uncertainties about the need for, and extent of, debt restructuring increased. The drain of FX reserves year-to-date means the Bank of Ghana (BoG) now has limited firepower to smooth FX volatility. However, we believe the main trigger for the move to 14.875 (mid) in spot over recent days can be traced to BoG’s decision to purchase dollars from mining and oil companies, inadvertently reducing FX availability within the inter-bank market.”
“Although the current account deficit (CAD) is only moderately wider, the loss of confidence domestically has resulted in a significant drain from the financial account, even though portfolio outflows have been relatively limited. Based on our risk-reward scorecard, Ghana now looks attractive, but we expect concerns about the scope of debt restructuring to continue dominating, potentially leading to even more GHS weakness, even if an increase in FX forward auction sizes or reversal of the FX purchase policy results in short-term respite for the cedi”, it added.
Even though the new FX purchase strategy is just a few months old, it has already pushed FX away from the secondary market, leading to increasing FX pressure. It also noted that the Bank of Ghana’s purchase of dollars from mining companies has caused a squeeze in the FX market.
In the interim, despite demand totalling $100 million every auction, the Central Bank has not changed the size of its twice-weekly FX forward auctions, where it continues to sell $25 million.
“To reduce volatility, we believe the BoG may need to use proceeds from mining sector FX purchases to increase interventions, or alternatively, reverse the FX purchase policy. Since the policy was implemented, the central bank reports that it had purchased around $84 million as at end-September [2022] and expects to have purchased $500 million by year-end”.
Foreign Exchange Policy Change for Near-term Relief
The US banking giant continued by stating that the current volatility of the cedi is primarily driven by policy, but medium-term pressure will continue.
It did emphasize that a change in FX purchasing strategy might bring about some short-term assistance.
It also said the FX reserves have been drained at a breath-taking pace, noting, “Gross international reserves have declined to $6.6 billion as at end-September, from $9.7 billion at the start of the year. However, net reserves have declined at a faster pace, reaching $2.7 billion in September [2022], from $6.1 billion in January”.
By the end of this year, according to JP Morgan, gross reserves will have decreased to $5.6 billion ($1.6 billion for net reserves) at such rate, however the disbursement of the $1.1 billion Cocobod syndicated loan should increase foreign exchange reserves.
Furthermore, the Bank of Ghana’s decision to buy the majority of the dollars from mining corporations may have decreased confidence even more, accelerated the dollarization process, and resulted in a net exodus of citizens.
Adam Ibrahim
Adam is passionate about politics and issues that affect governance. As a writer, he channels his energies into writing on pertinent national and political issues for the good of the Ghanaian people.