While a lot has been written and said about the Cedi’s recent depreciation against Ghana’s major international trading currencies (somewhat reminiscent of the 2014-15 periods), I’d like to offer some additional insights. To understand the Cedi’s recent depreciation, you need to fundamentally grasp the interconnections among the following parameters: 1. Ghana Fundamentals (Fiscal Policy); 2. Ghana Fundamentals (Monetary Policy); and 3. Global Market Developments and its impact on portfolio investments in Ghana.
A. Ghana Fundamentals (Fiscal Policy)
- Short to medium term economic growth prospects remain robust
- Public debt (including banking sector bailout)
- Current account (trade balance, international reserves)
- Fiscal balances (revenue under-performance despite fiscal consolidation drive and rollout of digitalisation initiatives)
- Uncertainty by portfolio investors on Ghana maintaining strong fiscal balances post-IMF exit in April 2019 as it heads into electioneering mode from H2 2019. Recent announcements of the government eyeing a US$3 billion Eurobond in the coming weeks and US$750 million bridge loan from StanChart and Standard Bank to repay with the proceeds of a Eurobond sale, and proceeds of Cocoa syndicated loan as a stopgap measure for the weakening Ghana Cedi don’t add much confidence. The above still shows that we’re struggling with the fundamental question of economic diversification. Ghana’s economy is still dependent on three key exports: Gold, Cocoa and crude oil. However, we can do a lot more with non-traditional exports (NTEs) while also aggressively consuming more locally produced goods and services.
(B) Ghana Fundamentals (Monetary Policy)
- Monetary Policy Rate (MPR) decision by the Central Bank to lower MPR by 100 basis points indicating expectations of a relatively lose (expansionary) monetary policy stance; this move spooked the market given higher inflation expectation and yet-to-be established fiscal thresholds post-IMF exit in April 2019 (regardless of the Public Financial Management and newly-passed Fiscal Responsibility Act and Fiscal Council)
- Inflation (inflation continues to be moderate but indications are that it is likely to pick up due to cost pass-through of higher fuel and utilities prices and weaker cedi)
- Sovereign Ratings (S&P/Fitch/Moody’s) indicate relative medium-term stability
(C) Global Market Developments
- Emerging Markets portfolio flows (most EM currencies continue to tumble from weak domestic policies and higher US FED rates, making the holding of US assets preferable).
- US FED interest rate hikes and US-China Trade War : 3. A recent Bank of Ghana Working Paper (WP/BOG-2019/01) shows that the Ghanaian economy (like other emerging markets) has increasingly become integrated into the global economy through TRADE and FINANCIAL MARKETS channels, exposing the economy to greater external shocks with adverse spillover implications. External factors play an important role in the Ghanaian economy and that domestic fundamentals may either act to amplify or dampen the impact of these external developments on the Ghanaian economy. Tighter financing conditions as captured by an increase in U.S policy rate, for example, leads to the exchange rate (the Cedi) depreciating sharply as expected perhaps triggered by outflows and interest rate rise