Cedi expected to remain stable

The local currency has been predicted to remain stable for the rest of the year, reinforcing sentiments expressed by the Bank of Ghana that the macro-economy will continue to stabilise in the short-term.

Analysts and researchers in separate reviews of the economy have observed a strengthened currency since the start of the year, and forecast a similar trend for the last six months of the year.

Earlier in the year, the Centre for Policy Analysis (CEPA) reported that lower inflation and currency stabilisation were important outcomes of government’s fiscal restraint and prevailing upbeat expectations about Ghana becoming an oil-economy.

“There have already been signs of the cedi appreciating against key currencies in the first quarter of this year, and this trend is expected to continue for the rest of the year,” CEPA had indicated.

More recently, analysts at Business Monitor International (BMI), a business and economic intelligence provider based in the UK, have forecast a “broadly stable” cedi in the coming months - and further anticipate that the local currency will trade sideways within the GH¢1.4100-1.4300 range against the US dollar.

“Our view is based on our expectation for the underlying drivers of the cedi to remain in balance. On the one hand, the current account should stay in deficit, with capital imports weighing heavily on the account. On the other hand, we expect sizeable inflows to the capital and financial account as Ghana receives increasing attention from foreign investors,” the analysts reported.

Ghana’s trade deficit - the major component of the current account - for the first half of the year widened to US$1.2 billion, compared to US$1 billion in the same period last year. The increase is owed to a higher rise in imports than exports – while exports grew by 22.8% to US$3.9 billion, imports in the first half of 2010 amounted to US$ 5.14 billion, 28.1% higher than the level recorded in the previous period of 2009.

This trend on the current account was significantly offset by Foreign Direct Investment (FDI) flows estimated at US$599.34 million between March and June this year. This figure represents 90.44% of the total value – US$662.68 million – of the 105 new projects registered by the Ghana Investment Promotion Council (GEPC) in the second quarter of 2010.

These underlying drivers of the cedi’s value have been fairly balanced over the last few months and contributed substantially to the relative stability of the domestic currency in the period.

The local currency’s depreciation since late-2008 slowed in mid-2009, declining in year-on-year (y-on-y) terms by 14.8% against the US dollar as at December 2009 – an improvement from the 29.8% y-on-y depreciation recorded in June 2009.

Also, the cedi depreciated against the pound sterling and the euro by 22.4% and 16.2% y-on-y respectively in December 2009. By January this year, y-on-y depreciation had slowed to 10.2%, 20.7% and 15.6% against the US dollar, the pound sterling and the euro respectively.

This improving trend continued to March this year, when the cedi’s y-on-y depreciation against the US dollar slowed to 2.5%, and subsequently entered positive territory in June this year with y-on-y appreciations of 3.3%, 13.3% and 18.4% against the dollar, pound sterling and euro respectively.

Most researchers and market watchers expect the cedi - on the back of this impressive trend - to still perform strongly for the rest of the year, with new anticipated investment inflows proving enough to counter any deterioration on the economy’s current account.

As oil production begins in the final months of 2010, market indications are expected to reveal strong investor interest in Ghana’s economy, contributing to the overall favourable outlook for the cedi.

With this bullish outlook for the Ghanaian currency, businesses that rely on imports could see stable input costs that have overall positive effects on profitability.

CEPA, however, has warned of the downside effects of a strong currency – Dutch Disease – especially as Ghana becomes an oil province in West Africa. It has therefore called for effective and proactive management of the cedi to counteract any threats to export-competitiveness.

The Central Bank, though, projects that this trend, together with stable food and fuel prices as well as fiscal consolidation, will keep inflation in check and broadly around the year-end target of 9.2%.

Source B&FT