Tuesday, September 06, 2016 6.53pm/ BMI Research
BMI View: The Ghanaian cedi will break out of its range trading over the coming months due to declining central bank reserves and investor worries over upcoming elections. The depreciation will not be as marked as seen recently, however, owing to an improving macroeconomic environment.
Short-Term Outlook (three to six months)
Over the next three months we expect the Ghanaian cedi will continue to trade within the narrow GHS3.7-GHS3.9/USD band it has been trading within since September last year when the previous period of high volatility settled down.
Inflows of dollars from the COCOBOD syndicated loan and a USD1bn eurobond issuance helped stem the massive volatility in the market in the months prior, aided by the Bank of Ghana (BoG) injecting money into the economy.
Looking further ahead, we expect there will be greater volatility from July onwards. Although this will not reach the level in 2014 and H115, which were characterised by steep depreciation and the occasional sharp rally, but the flat trading of the past seven months will not be maintained for two primary reasons.
First, the Bank of Ghana's ability to protect the currency at this level will dissipate as reserves are run down. These were at USD5.4bn in February, still strong following the inflow of cash in Q315, but down from the USD6.0bn recorded in November.
Inflows of cash from Eurobonds over the past several years have generally been followed by a subsequent rundown in reserves. The government plans to issue a new eurobond this year, which will see reserves boosted. However, while finance minister Seth Terkper has previously said this would happen in the first half of the year, the ministry of finance has officially denied its current roadshow is aimed at an issuance, meaning the H1 target is less likely to be met.
Second, upcoming November elections and the potential for overspending by the Ghanaian government in an attempt to shore up support prior to the vote will concern investors in the run-up. The risk of an overspend by the authorities is a repeat topic of conversation between BMI and clients.
We maintain our view that while there will be some slippage, a pronounced overspend which would ramp up the fiscal deficit and lead to Ghana failing its IMF programme will not happen, but the possibility will continue to concern investors nonetheless.
Long-Term Outlook (six to 24 months)
Beyond the six-month timeframe, we expect the trend for the cedi will be depreciation. We have long forecast a 10.0% depreciation over 2016, which would see the currency end the year at GHS4.2/USD, followed by a further 5.0% depreciation to GHS4.5/USD in 2017.
This is a view shared by leading businessmen in Ghana: a Deloitte survey of chief financial officers in Ghana found they overwhelmingly expected further depreciation, and this was a major concern to them and their businesses.
The depreciation will be driven by current and fiscal account deficits. Nevertheless, we do not expect the cedi depreciate at the same rapid pace it has previously, anticipating an improving macroeconomic environment will mean a more gentle loss of value against the greenback.
The launch of the TEN oilfield in July or August will boost inflows of dollars – BMI's Oil & Gas team forecast Ghanaian crude production will climb 8.0% in 2016 and 30.0% in 2017, rising to 153,300 barrels per day.
This will help Ghana reduce its current account deficit, which we forecast at 7.0% of GDP in 2017 compared to 8.4% in 2015. Tight monetary policy will also help shore up the cedi. The authorities have been committed to curbing inflation even at the cost of economic growth.
The key policy rate is currently 26.0%, but with March inflation at 19.2% – the highest level since August 2009 – we anticipate a further 100 basis points rate hike at the next monetary policy meeting in May.
Risks to Outlook
The risks to our outlook are to the downside, with the most salient stemming from domestic factors. Should Ghana fail to abide by stipulations of its IMF programme, running up the budget deficit on the back of increased recurrent spending in the run-up to the November elections, investor sentiment to the cedi would once again turn sour, leading to a renewed selloff in the currency.