Analysts optimistic about cedi’s resilience ahead of Christmas festivities
Currency analysts are optimistic of a resilient cedi ahead of the Christmas festivities in December.
The optimism expressed by analysts is despite the local currency’s depreciation against its major trading currency, the US dollar, by about 1.8 percent at the end of September 2021.
Even though the cedi has been depreciating against the dollar for the past three months, it still holds the record of the best performance ever seen in nine months of any year in memorable history.
And despite the impending festive season heightening the risk of depreciation, market watchers say there is no cause for worry, given measures put in place by the central bank.
“The run-up to the festive season is expected to increase pressure on an already stressed local currency. However, the BoG has done creditably well managing the FX rate using its fortnightly auctions which have typically fallen short of total FX demanded by the market.
There is the belief that the auctions provide a certain level of predictability and this has helped maintain some stability. Outside anticipated inflows from cocoa loans, the bank has shown the capacity to maintain large enough reserves to buoy the cedi. Depreciation of the cedi against the dollar has been minimal and could beat 2020’s performance of 3.93 percent, all things being equal,” said Senior Investment Analyst at OctaneDC Limited, Kwadwo Acheampong, in an interview with the B&FT.
Senior Economist with Databank, Courage Kingsley Martey, also in an interview with the B&FT mentioned that the reserves data shows strong position aside from the cocoa loan inflow yet to be added.
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“The market sees and believes that it should see us through the quarter four. But there are indications that we would possibly allow some moderate depreciation before the end of the year in order to deplete the reserves.
This may become necessary if the financial market pressures become elevated in addition to the import bills. However, we do not expect us to end this year significantly worse than last year, in terms of the USD/GHS depreciation rate,” he said.
The Bank of Ghana has put in some systems to mitigate the risk of depreciation on the local currency. Key among them is the accumulation of gross international reserves in excess of US$11 billion, equivalent to 5.2 months of import cover, which is stimulating optimism in the market that the country has enough forex to meet the possible sharply rising demand for foreign currencies.
Per the central bank, the strong reserves build-up over the review period provided some buffer to the local currency, which came under some demand pressures from commerce, manufacturing, and energy sectors as economic activity picked up in the third quarter of 2021.
In addition to this, the Bank of Ghana (BoG) has, over the last four fortnightly forward forex auction, either doubled or tripled the original $25 million it intended to release onto the market.
Also, the country expects an inflow of the US$1.5 billion cocoa syndicated loan as part of an annual pre-export preparation to finance cocoa purchases and operations costs for the upcoming 2021/22 season. The expected inflows could only strengthen the Bank’s capacity to sustain the cedi and maintain a strong FX reserves position.
However, market analysts have cautioned of an imminent threat from the recent strengthening of the US dollar, amidst rising US inflation, rising long-term bond yields, and anticipated earlier-than-expected tapering of bond purchase programmes by central banks in advanced economies.
According to Mr Acheampong, “A threat to the cedi’s stability, however, could be posed by the Fed Reserve increasing interest rates to combat the US inflation/stagflation, thereby, strengthening the US dollar. However, a stronger revenue situation from exports and taxes would help keep reserves stronger and, by extension, the FX rate, more robust.”
