Standard Bank challenges BoG on Cedi depreciation

Adnan Adams Mohammed

Standard Bank has challenged the assertions of the Bank of Ghana (BoG) that, the Ghana cedi would have experienced a persistent appreciation against the US dollar if not for the challenges facing the emerging markets.

The Governor of the Bank of Ghana, Dr Ernest Addison speaking on Bloomberg TV show ‘Bloomberg Markets: European Open’, last week stated that, the cedi appreciated against the dollar within the first five months of 2018, till the emerging market was hit with increased in U.S interest rates. This resulted in the depreciation of the currencies of such markets, including Ghana.

“Throughout last year, the currency was relatively stable and in the first five months of this year, it actually appreciated against the US dollar until May when the emerging market problem started and then we started seeing additional currency depreciation, losing almost 7% by September,” Dr. Addison said

The Standard Bank, in its latest African Markets Revealed report said, the depreciation of the local currency against the major trading currencies this year was due to intensified portfolio outflows from the local bond market.

The report indicated that the local-currency bond market has been hugely affected by negative sentiments, causing foreign investors to sell down their holdings of the local paper.

“Negative sentiment towards emerging markets has prevailed. Some local currency bond markets have been affected by this negativity, especially Egypt, Ghana, Nigeria, and Zambia, with foreign investors in those markets selling down their holdings of local paper, adding that, secondary market yields in some of these markets reflect the stressed selling”, the report said.

The consequence of this is an upward pressure on the local currency and an increased demand for forex.

The African Markets report noted that: “We see USD/GHS heading higher over the coming 12 months, rising at an annualised pace of between 5% and 8% in the medium-term. The upward pressure on the pair between April and September may well have been exacerbated by portfolio outflows from the local bond market. However, holdings of local bonds by foreigners did not change much in that period. But the increased demand for forex may have emanated from the repatriation of coupon payments that were not reinvested. A turnaround in portfolio flows, triggering a fresh round of inflows into the market, cannot be ruled out once economic margin flux settles down.”

These factors notwithstanding, researchers and economists at Standard Bank believe that the fundamentals of the Ghanaian economy still remain strong with a tighter fiscal policy.

The report said that, “We are still of the view that the Ghanaian Balance of Payment (BOP) is in a much stronger position than it was between 2012 and 2015 when USD/GHS was rising at more than a 20% annualised pace. Compared to the period between 2012 and 2015, fiscal policy is tighter.”

This was further augmented by the aggressive posturing of the Central Bank’ Monetary Policy Committee in ensuring that there is more surplus than deficit in the country’s balance of payment.

“Furthermore, the BoG’s Monetary Policy Committee has adopted a rather hawkish stance. Of course, the trade account is arguably much stronger now, too, with surpluses more likely than deficits in the coming years due to a ramp-up in oil production, while exports of gold and cocoa are likely to remain strong as well. This suggests that this wave of selling of bonds, which may be pushing USD/GHS higher, is bound to subside”, the report said.

Dr. Addison noted that, the Ghanaian economy has experienced “a significant turnaround in the macroeconomic fundamentals, fiscal consolidation, a fairly robust balance of payment, development.”

According to Dr. Addision, “all of that improvement reflected somewhat in the behaviour of the cedi” in 2017 and the beginning of 2018.

The Ghana cedi in recent times depreciated marginally against major international currencies, especially the US dollar causing fears within the business community.

The Bank of Ghana introduced measures at the beginning of 2018, to halt the depreciating of the Cedi, among which included the withdrawal of both Foreign Currency and Foreign Exchange Accounts in Cedis, at the existing exchange rate over the counter, except for travelling purposes.

Consequently, Vice President Dr Mahmud BaMahmud has said, government is taking the necessary steps to put in place safeguards to ensure the macroeconomic gains made in the last 21 months are not reversed.

A key component of these measures is the expected passage, by the end of the year, of a Fiscal Responsibility Law to cap the budget deficit not to exceed 5% for a fiscal year, as well as setting up of regulatory and advisory bodies to guide government’s fiscal and financial sector management.

The Vice President said this when he addressed the Ghana Investment & Opportunity Summit 2018 in London last week.

“Cognizant of the tendency to backtrack on our progress, Government is putting in place measures to ensure irreversibility of the gains we have achieved so far. To this end, we are implementing structural measures to tackle some of the long-term structural issues. We intend to urge Parliament to pass, by the end of this year, a Fiscal Responsibility law to cap the budget deficit not to exceed 5% for a fiscal year.

“We will also ensure complementary fiscal and financial sector management and establish institutional safeguards such as an independent Financial Stability Council, Fiscal Council, and an International Economic Advisory Council.”

“The overarching objective,” according to Vice President Bawumia, “is to safeguard the financial system, deepen financial intermediation, widen financial inclusion, and position Ghana as a West Africa Financial hub and economy with greater policy credibility.”