LIKE many other countries in Africa, Ghana’s currency, the cedi has been subject to volatility for the better part of 2015, mostly due to falling commodity prices globally and growing import demand locally. These challenges are partially due to macro-economic imbalances arising from 2014.
There are external factors which threaten Ghana as an economy going forward, although the International Monetary Fund (IMF) support received in April has increased medium term confidence for the Ghanaian economy.
Global prices for Ghana’s major dollar generating exports such as gold and oil have been under pressure. Gold prices hit 5-year record lows of $1,072 in July this year and has since been in the range of $1,090 and $1,144 per troy ounce since August. This had been mainly due to anticipation of the US Federal Reserve raising interest rates but the regulator on September 17 decided to hold them constant.
More than a third of gold in the world market is used as a store of value, especially as an insurance policy against social or political upheavals. The problem is that gold doesn’t pay interest or give returns, like bonds and equities do.
Investors would rather pull out their money tied up in gold, and buy government bills and bonds, which pay interest. That reduces demand of gold in the market, pushing its price down.
Oil prices have fallen almost 60% in value since June 2014; this has been as a result of the largest global surplus in recent times and rising concerns about a slowing Chinese economy. Crude oil futures were around $44 per barrel last week.
Cocoa supply has come under pressure due to crop disease and unfavourable weather patterns for Ghana. However the fall in supply has been offset by increases in global prices due to the same shortage. Cocoa hit a 30-year high of $3,500 per tonne this year.
US real interest rate dynamics will be critical to performance of most frontier markets like Ghana. The threat of US Fed hiking rates had likely limited international credit appetite for emerging markets which would in turn affect capital flows into the region.
The last threat to factor in would be the 2016 election year speculation. Capital inflows will be reduced whilst capital outflows will increase in anticipation of a close election. The outcome is expected to be peaceful, however, markets will price in any risk factors and this could exacerbate pressure for the period.
Although Ghana’s public debt has now exceeded the levels before debt relief under Highly Indebted Poor Countries (HIPC), under an IMF programme, the country has a fighting chance.
Reserves need to be grown beyond the current 2.5 months import cover to beyond 3 months import cover. There will be a lot of focus on direct investments into energy to boost manufacturing sector.
The IMF programme will seek to bring interest rates down to boost corporate access to financing and curb inflation. It will also seek to increase the export base and reduce import needs to help address balance of payment challenges.
The cedi has fallen 18.50% this year so far, opening at 3.2176 and is currently in the vicinity of 3.9441. But the next potential trigger for dollar/cedi performance will be the success rate of the $1.5 billion Eurobond to be issued later this month.
Ghana is an import driven economy and therefore the performance of the currency affects inflation and ultimately interest rates. The ability of the Bank of Ghana to manage currency volatility will be pivotal to macro-economic stability. Ghana’s debt sustainability becomes questionable if risks to the cedi’s depreciation are not checked.
-Kofi Pianim is Head of Trading & Global Markets at Stanbic Bank Ghana.