Although the Ghanaian local currency – the cedi – is confronted with heightened risk, Databank, the assets management company, has maintained its year-end forecast for the interbank Bank of Ghana (BoG) reference rate at GH¢6.05/USD (± 10Pesewas).
Currently, the imminent depreciation risks emanate from threats of a taper-induced selloff which heightened since the third quarter of 2021, as well as rising import demand. Last week the cedi depreciated against the dollar, trading at GH¢6.08 compared to GH¢6.07 the previous week, amid increased FX demand from investors repatriating bond maturity proceeds.
Per the outlook, Databank said: “We maintain our year-end forecast for the interbank BoG reference rate at GH¢6.05/USD (± 10 Pesewas). A potential taper-induced outflow of foreign portfolio investments amid the rising import demand is a depreciation risk in the fourth quarter of 2021.
“The Ghana cedi (GH¢) endured increased selling pressure in 3Q21, which resulted in a 1.77 percent quarter on quarter (QoQ) depreciation against the US dollar – as against depreciation of 0.59 percent in the second quarter of 2021 and an appreciation of 0.55 percent in the first quarter of 2021. During the period, demand for forex came from the commerce, manufacturing and energy sectors as the economy recovered with higher oil prices.”
In September 2021, the monetary policy outlook in the developed markets turned hawkish, with the US Federal Reserve expected to start scaling back its COVID-related supports from Nov-21 through mid-2022.
Following the tapering policy announcement by the US Fed, there has been an upturn in the Dollar Index (DXY) – pushing above 94 points as of the end of September 2021 against 92 points prior to the announcement. The rising DXY indicates a global strengthening of the US dollar against major currencies, with more upside potential.
“We also observe a steep increase in US benchmark yields, narrowing the carry trade opportunities for investors in emerging and frontier markets. We view these developments in the global financial markets as a depreciation risk to the GH¢ as foreign capital inflows reduce in favour of the less risky US Treasury securities and the benchmark US dollar,” Databank stated.
Ghana’s external account balance remained resilient during the first 8-months of 2021, with gross forex reserves at US$11.4billion (5.2 months of imports) as of August-2021. The trade surplus narrowed by 35.6 percent YoY to US$874million (1.2 percent of GDP) compared to 2.0 percent of GDP in August-2020 as contraction in the mining sector weighed on export revenues. Concurrently, the ongoing recovery in economic activity increased the total import bill by 8.6 percent YoY, reducing the trade surplus.
However, the investment company said the Eurobond issued in the first half of 2021 combined with 70 percent balance of payment (BoP) allocation of the US$1billion special drawing rights (SDRs) boosted gross reserves and strengthened the BoG’s support for the cedi; while the US$1.5billion inflows from the COCOBOD syndicated loan should add an extra layer of support for the cedi to anchor the US$GH¢ around the GH¢6.0 mark by the full year 2021.
The BoG’s fortnightly forward forex auction results show that the central bank has increased its intervention on the forex market.