Business News of Friday, 13 July 2012

Source: Daily Graphic

Cedi Woes Not Over

It appears the end to the depreciation of the cedi, which has since January this year hit over 20 per cent, will last a little longer. Samuel Doe Ablordepprey reports.

It appears the end to the decepreciation of the cedi, which has since January this year hit over 20 per cent, will last a little longer. Samuel Doe Ablordeppey reports

Economic and financial experts have predicted more troubles for the Ghana cedi in the coming months as a result of several factors, including rising imports in the face of declining exports.

As of the end of May this year, total merchandise exports grew by 24.6 per cent year-on-year, against total merchandise imports growth of 27.9 per cent year-on-year with the balance of trade recording a deficit of US$937.3 million by end May 2012, compared with a deficit of US$597.2 million recorded in the same period a year ago.

Analysts from Absa Capital, a member of the Barclays Group, see the cedi closing the year at around GH¢1.98 to the dollar, rising thereafter to about GH¢2 before receding at the back of higher inflows from oil exports and commodity price hikes.

The team of experts from Absa Capital, led by Mr Jeff Gable, an authority on emerging markets, said at a Barclays Bank of Ghana forum in Accra that continued import demands and high consumption at infrastructure level, against liturgic remittances out of Europe because of the crisis in the euro zone, would combine to put more pressure on the local currency.

As a direct result of the euro zone slowdown, cumulative inward remittances through the banking system grew only by 7.5 per cent year-on-year out, Bank of Ghana figures indicate. Remittances that accrued to individuals recorded a growth of 6.6 per cent of over the same period in 2011.

“We expect the pace of depreciation to slow mainly because interest rates are on the rise, while the measures introduced to check the forex exchange depreciation would also yield positive dividend,” the Foreign Exchange Strategist at Absa Capital, Mr Mike Keenan, said.

However, the Governor of the Bank of Ghana, Paa Kwesi Amissah-Arthur, believes measures introduced by the central bank to check the weakening of the cedi should enable it to stabilise within the next six months.

The governor said the 14 per cent growth in the gross domestic product (GDP) had brought about nearly 80 per cent rise in imports, and wants banks which financed such transactions to do so prudently in order not to burn their fingers.

Total merchandise exports were US$6.6 billion over the first five months of 2012, representing a year-on-year growth of 24.6 per cent. On the other side, total imports reached US$7.5 billion during the five months, indicating a growth of 27.9 per cent on a year-on-year basis.

The balance on the trade account, therefore, registered a deficit of US$937.3 million by end May 2012, compared with a deficit of US$597.2 million recorded in the same period a year ago.

For the first quarter of 2012, the Balance of Payments recorded a deficit of US$1.3 billion, compared to a deficit of only US$154.2 million in the same period of 2011, while gross international reserves of the Bank of Ghana declined to US$4.3 billion as at June 8, from U$5.4 billion in December 2011. This is equivalent to 2.5 months imports cover of goods and services.

Mr Keenan said the cedi had underperformed its peers in the Sub-Saharan Africa basket, weakening by almost negative 16 per cent against the dollar.

“Even though the cedi has already weakened dramatically this year, we expect the local unit to maintain a weakening bias over the coming months. We continue to see scope for the BoG to hike its lending rates over the coming months,” Mr Keenan said.

However, he said, such an action by the central bank would not have the desired impact on the demand for the dollar, especially since such demands were informed by rising consumption and infrastructure financing.

The foreign exchange strategist also looked at trending correlations of the cedi with other currencies and happenings in the United States and European economies, while concluding that the cedi was inversely related to the status of the dollar, where a strengthening dollar always gave some value to the cedi, and vice versa.

The cedi, however, had a positive relationship with rising prices of commodities such as gold and cocoa, adding that although the cedi traditionally strengthened in the third quarter of the year, such a fate was relatively vulnerable due to factors such as depleting reserves and worsening current account balances.

The Africa Strategist at Absa, Mr Rodle Markus, said although Ghana seemed to be going through some challenges, its “bad days are good” considering that they expected commodity prices to rally by the close of the year, and even higher into 2013.

Mr Markus, however, pointed out that the weakening currency situation was an emerging economy issue with many African economies suffering the same fate, partly because of the global investor aversion to risk which was squeezing foreign direct investment flows away from frontier markets such as Sub-Saharan Africa.

He was optimistic also that the increasing focus on commercial infrastructural development would turn out to serve the economy positively going forward; the very phenomenon which Mr Amissah-Arthur believes would impact positively on the currency in the next six months.

“We believe we will see stability of the cedi in the next six months after which the cedi will begin to appreciate as the trend has been,” the central bank governor said, as he commended Barclays Bank for organising the economic update series.

The Managing Director of Barclays Bank of Ghana Limited, Mr Benjamin Dabrah, said the rising interest rates on the banking sector was necessitated by several factors but said it could help attract investors to invest in the economy, and thus contribute in halting the decline of the cedi.

“I see the decrease in interest rates in the last few months as a direct consequence of the weakening cedi that we saw. One of the things you want to do is to make your currency attractive to the investors. If I make the interest rate a little high, it attracts people to invest in the local currency. This actually accounts for the relative slow down in the value of the cedi,” Mr Dabrah explained and lauded the BoG’s decision to raise its policy rate.

Throwing light on the forum, the Barclays Ghana managing director said they carefully chose the topic to reflect the current local economic situation.