Government 3-year bond offers respite for cedi - RMB

A 3-year bond issued by government was timely enough to provide respite to a local currency which had gone under intense pressure for the last month due to the increasing demand for dollars, according to South African based market research firm RMB.

The weak cedi has had to rely on series of government bonds to withstand the might of the dollar as it struggled against the greenback on the interbank market in the second week of May, following a gradual depreciation.

Central Bank data shows the cedi was exchanging to the dollar at GH¢4.2091 as of May 12, worsening to GH¢4.2976 in May 30, representing a 2.1 percent depreciation during the period.

The effect of the Cedi equivalent of the US$2.25 billion bond issued by government on March 31, which temporarily boosted the strength of the local currency, had long waned leading to a bout of renewed pressure on the currency the same month.

According to the research firm, the weak performance by the cedi could be attributed to surge in demand by “corporates” which clearly outstripped supply leading to the current depreciation.

“On a year-to-date basis, the local unit is unchanged but in the last two months we have seen a surge in FX demand from corporates which is outstripping any supply, causing the currency to weaken by 3.6% [not interbank] since the beginning of April,” the firm said in its latest weekly report.

But last Wednesday, a GH¢705 million (US$163.47 million) bond issued by government was enough to stem the gradual depreciation of the cedi. As of May 31 transaction, the year-to-date depreciation was about 2.1 percent [interbank] but following the sale, the depreciation improved slightly to 1.8 percent the same period.

RMB Global Markets Research, which is a subsidiary of the FirstRand Bank, stated that: “We expect the cedi to trade sideways, with a bias for marginal strength on account of offshore portfolio inflows following the fairly successful 3-year local bond auction conducted last week.”

Regarding the performance of the cedi for the rest of the year, RMB said, on account of fairly healthy FX reserves of US$6.4 bn (3.7 months of import cover), it expects the Bank of Ghana to cushion the currency against potential pressures that may weaken it.

A strong cedi would be a tremendous boost to importers in an economy largely dependent on imports. For government’s own interest payments, a strong cedi would mean the foreign component, approximately 20 percent of the overall interest payment, becomes cheaper.

Total interest payment on government debt is estimated at GH¢13.9 billion, representing 23.9 percent of total expenditure, and is equivalent to 6.9 percent of GDP. From the amount, domestic interest payment constitutes 80.5 percent and amounts to GH¢11.2 billion.