BoG partly to blame for cedi depreciation – JP Morgan says
US financial services firm, JP Morgan has said the Bank of Ghana is partly to be blamed for the depreciation of the cedi.
According to JP Morgan, the Bank of Ghana’s decision to purchase dollars from mining and oil companies, inadvertently reducing forex availability within the inter-bank market is one of the reasons behind the falling value of the cedi.
It also said the loss of confidence domestically has resulted in a significant drain from the financial account, even though portfolio outflows have been relatively limited.
“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.
Furthermore, it pointed out that the Bank of Ghana’s purchase of dollars from mining companies has resulted in a squeeze in the FX market, adding, while the new FX purchase policy is only a few months old, it has shifted FX away from the secondary market, thus resulting in increased FX pressure.
In the meantime, the Central Bank has not increased the size of its fortnightly FX forward auctions, where it continues to sell $25 million, despite receiving demand amounting to $100 million per auction.
“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”.
The US banking giant adds that, the recent volatility of the cedi is mostly policy driven, but medium-term pressure to persist
However, it stressed that a change in FX purchase policy could provide some near-term relief.
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’.
At that pace, JP Morgan said gross reserves will have declined to $5.6 billion by the end of this year ($1.6 billion for net reserves), although disbursement of the $1.1 billion Cocobod syndicated loan should provide a boost to FX reserves.
Furthermore, the Bank of Ghana’s decision to purchase most dollars from mining companies may have dampened confidence further and could result in a further acceleration of dollarization and outflows by residents.
