Course Prospects Remain Promising Amid Short-Term Reserve Concerns (regarding Cedi)
Spinning a yarn about Ghana's currency sailing smooth in H2-23
Ghana's currency, the cedi, might just be riding the waves to smoother waters in the second half of 2023 (H2-23), powered by a hefty foreign exchange (FX) inflow and a strengthening investor confidence.
The nation is prepped to receive a massive chunk of change, with nearly a billion dollars from the World Bank and a possible second serving of US$600 million from the IMF in November 2023, following a victorious review in September 2023. Adding to the festivities, Ghana's external debt restructuring plan is on track for conclusion in H2-23.
Databank, an asset management company, has a hunch that the cedi will remain within certain boundaries and trade between GH¢10.9 and GH¢11.1 to US$1 for the Bank of Ghana (BoG) interbank reference rate by year's end. Their reasoning? The successful conclusion of external debt restructuring and the subsequent boost in investor confidence will attract portfolio inflows, strengthening FX liquidity in the market.
The sweet cocoa loans, valued at around US$2 billion, are expected to flood the FX reserves, bolstering intervention capabilities for the central bank and supporting the stability of the Ghanaian currency.
H1-23 saw a relatively stable foreign exchange market, keeping its head above water thanks to positive vibes from the IMF's disbursement of the ECF's first tranche of US$600 million, foreign exchange purchases from the mining and oil sectors, and waning demand. Although the cedi depreciated by 20.6 percent against the almighty dollar in January 2023, it has stabilized since then, with a total depreciation of just 1.8 percent between February and June 2023.
Looking ahead, the government's debt service is anticipated to play a minor role in impacting foreign investor holdings of four maturing domestic bonds in H2-23, as these only make up 2 percent of the outstanding bonds. Consequently, the cedi is projected to maintain its cool demeanor in H2-23, and the central bank aims to meet its US$120 million target for the Bulk Oil Distribution Companies (BDC) FX forward auction in Q3-23.
Despite the cedi's impressive comeback since February 2023, concerns linger about the reserve buffer's vulnerability to shocks, with gross reserves (adjusted for petroleum funds and encumbered assets) projected to cover merely 0.8 months of imports by December 2023. This feeble cushion leaves the local unit open to near-term threats.
The approaching maturity of the Aug-2023 Eurobond's US$148.76 million face value could put a significant strain on FX reserves, limiting the central bank's sell-side interventions. In periods of high volatility, albeit unlikely, the cedi might suffer from speculative attacks. Moreover, if Saudi Arabia reduces its oil production by a million barrels daily, oil prices may skyrocket, inflation could soar, and Ghana's import bills could balloon, putting additional pressure on the cedi, as predicted by Databank.
Yet, the overall outlook for the cedi remains optimistic, with the expected funding and debt restructuring contributing to improved investor confidence and a calmer currency market.
In light of the anticipated foreign exchange inflows and strengthening investor confidence, a comprehensive finance report on Ghana's business sector could highlight the potential for the cedi to trade within specified boundaries and maintain stability in the market through the second half of 2023 (H2-23). This positive outlook is further supported by the expected conclusion of Ghana's external debt restructuring plan and the influx of funds from international financial institutions.
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