Offshore investors ditch US$1bn GoG bonds in 2 months

…which piles pressure on cedi

Foreign investors in Ghana’s bond market sold off a total of US$1.02billion dollars between April and June, which accounted for the sharp decline in the local currency in the second quarter of this year, Databank Research’s Half-Year report has said.

With the United State’s Federal Reserve tightening the monetary space, which strengthened the dollar and increased the rate on longer-dated Treasury bills in the USA, it motivated the selling pressures in emerging and frontier markets such as Ghana.

“We observed a 14 percent (GH¢4.51billion) decline in foreign investor holdings of GH¢-bonds between April to June 2018, equivalent to a US$1.02billion outflow. We believe this substantial FX outflow exerted immense depreciation pressure on the GH¢ despite the US$1.25billion Eurobond inflow in May-2018.

“The high concentration of foreign portfolio investors in Ghana’s domestic Treasury bonds (62 percent of outstanding medium-term securities as at Jun-2018) exposed the cedi’s vulnerability to sudden adverse changes in the external environment,” the report noted.

The cedi took a sharp nose-dive recently, depreciating by 5.7 percent against the US$ as at July 2017 – beating the 4.7 percent recorded for the entirety of 2017.

On July 3, however, the year-to-date depreciation was 2.4 percent – which means that in just two weeks the cedi depreciated by as much as it did in the first six months of the year.

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During the same period last year (July 17), the local currency recorded a 3.5 percent depreciation, which compared favourably with the 3.8 percent recorded in 2016.

“Following a first-quarter appreciation of 0.26 percent against the US$, the cedi’s stability was rocked by a wave of emerging and frontier market selloffs triggered by a more hawkish US Fed,” Databank Research noted.

“With an upturn in US Treasury yields, coupled with expectations of interest rate normalisation in the UK and an anticipated end to the Eurozone’s Quantitative Easing (QE) programme by end-2018, offshore investors commenced a rebalancing of their portfolios of EM and FM assets.”

The performance of the cedi on the forex market proper somehow reflects the interbank market performance, with Bloomberg which monitors forex trade at selected key banks in the country also indicating a 5.7 percent YTD depreciation.

With economic fundamentals continuing to strengthen, supported by declining inflation, surplus trade balance and narrowing fiscal deficit, government has submitted a fiscal responsibility bill to Parliament to establish a fiscal council and cap the budget deficit at 5 percent beginning 2019.

“We believe these prospects of continued improvements in economic fundamentals will sustain investor confidence and aid a return to cedi stability as the emerging market selloffs diminish,” Databank Research added.

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Due to the recent FX pressures and prospect for a near-term return to stability, Databank Research has revised its projected inter-bank US$/GH¢ exchange rate to GH¢4.70 ± 10 pesewas for end-2018. The previous forecast was GH¢4.59 ± 10pesewas.

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