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Wednesday, December 8, 2021

Cedi Under Pressure

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After enjoying strong appreciation against the major international trading currencies last year, the cedi began the year on patchy ground.
Unrelenting demand for dollars and lack of foreign inflows have forced the cedi to depreciate by 1.54% – far worse, compared to what happened the whole of last year. This development has become a source of worry to the business community, especially as some offshore investors are selling government bonds, recouping cedis and converting them into dollars – thus putting pressure on the cedi, which was stable within the 1.42 – 1.44 band for most of 2010.
Many companies, including those in the informal sector, are worried that the erratic nature of the cedi’s value will cause a decline in their profit margins. The main trait is that as the cedi depreciates, companies – especially those that have to account for some inputs in foreign currency – are left with exchange losses in the translation from the cedi to, say, dollars.
Posting exceptional items such as exchange losses in financial statements is nothing new, but where this becomes extremely significant and goes out of control – even after making contingent provisions for its occurrence in budgetary allocations – accountants and business managers find it difficult to plan for the future.
Analysts are equally worried about the development.
Collins Appiah, Head of Research at Gold Coast Securities Limited, believes that the cedi could fall further should the current trend continue.
“In 2008 [first quarter of 2008], and notably after the delay in the approval of Vodafone’s takeover of Ghana Telecom in Parliament, the cedi depreciated at an accelerated speed to reach a low of GH¢1.1639/$1 and GH¢1.804/euro – reinforcing a trend that has been evident over the last four years,” Collins stated.
“This trend, if not checked, is likely to cause imbalances in other economic fundamentals, especially the foreign import-cover reserves at the Bank of Ghana,” he added.
By the close of last week, for instance, the Gold Coast Securities (GCS) cedi Index had gone up by 1.75 points owing to the fall of the cedi against the major currencies. The Index, which tracks the performance of the local currency against the US dollar, the pound sterling, the euro and the CFA, has depreciated by 2.92% since the beginning of the year. This means that holistically, the cedi has lost its value by 2.92% against the four major trading currencies.
The index, developed by Gold Coast Securities Limited as a composite measure of the value of the cedi against the four major currencies, went up to 146.85 points last week Friday from 142.69 points at the beginning of the year.
This was underpinned by the following value depreciation: 1.54% fall to the US dollar, 3.75% fall to the British pound, 3.99% to the euro and 3.83% loss to the CFA. The local currency was buying at GH¢1.46 and selling for GH¢1.50 against the dollar. It was trading between GH¢2.32 and GH¢2.37 to the pound and was going for GH¢2.00 and GH¢2.05 against the euro. One Ghana cedi was quoted between 320 and 328 CFA.
Compared to the same period last year, the Index gained value of 1.16% – and this came from the fact that the cedi was mainly stable against the US dollar, appreciating by 0.21%. It also recorded appreciations of 2.13% against the euro and 2.18% against the pound. Gold Coast Securities’ State Index made a return of 3.36% while the equivalent dollar index for foreign investors showed only 1.6%.
After a roller-coaster January, Uganda’s shilling UGX is seen staying in a narrow range around 2,290/2,310 to the dollar, with most eyes on further central bank foreign exchange sales. Commercial banks in Kampala quoted the unit at 2,280/2,290 to the dollar from 2,340/2,345 a week ago. In early Thursday trade, it touched 2,275 – its strongest since Dec 3 according to Thomson Reuters data. Traders said a slew of Bank of Uganda (BoU) dollar sales had managed to halt the shilling’s slide to a historic low of 2,400 on Jan 18.
“Pretty obviously, there was speculative trading which was superficially weakening the shilling. But the BoU’s strong signals on the supply side have substantially lowered rewards for speculators and the market is finding some sort of equilibrium,” said Lucas Ochieng of Orient Bank.
Declining export receipts and political uncertainty ahead of a Feb 18 presidential election may also have been weighing on the unit, analysts say.
“Definitely, BoU’s injection of dollars into the market has offered huge relief. dollar buyers are holding off and I expect this subdued demand to be sustained in the week ahead,” said Faisal Bukenya, head of market making at Barclays Bank Uganda.
BoU Director of Communications Elliot Mwebya said the bank is satisfied with the shilling’s gains. “Our local currency has on average gained 100 shillings against the dollar and we’re satisfied, but we keep watching developments closely,” he said.
The shilling KES is expected to hold steady, but may weaken due to dollar demand from the energy sector.
Commercial banks quoted it at 81.00/10 to the dollar, from last week’s Wednesday’s close of 80.85/95. Traders said they expected it to trade in the 80.75-81.25 range in coming days.”I still expect it to trade in a narrow range. I do not expect much activity as we close January, but activity should pick up in February,” said Solomon Alubala, head of trading at Co-operative Bank.
Others felt the shilling could weaken.
“We still feel the shilling will be on the back foot because there seems to be some decent demand from some corporates and the oil sector, and the manufacturing sector also sneaks in once in a while,” said Sameer Lagadia, head of trading at Diamond Trust Bank.
Analysts expect the shilling to ease in 2011, with high global food and oil prices piling pressure on foreign reserves. “As the oil price is expected to trend higher in 2011 and food prices are shooting up, Kenya’s import cover is expected to move into the 3-3.5 month region and the shilling is likely to come under pressure to depreciate,” Renaissance Capital said.
Charts point to the shilling in a weakening trend, with the currency below its 50 and 100-day simple moving averages.
The Tanzanian shilling, TZS, is likely to weaken further to within a whisker of a lifetime low amid concerns about a dollar shortage if the state power utility pays a private firm US$65.8 million for alleged breach of an energy contract.
Commercial banks quoted it at 1,495/1,510 to the dollar compared to a 3-1/2 month low of 1,516 touched on Tuesday. The unit was likely to trade in the 1,510-1,520 range in the coming week, traders said. The shilling lost more than 8 percent of its value against the dollar in 2010, hitting a lifetime low of 1,527 in May.
International arbitrators ordered state-run Tanzania Electric Supply Company (TANESCO) to pay Dowans Holdings SA $65.8 million for breach of contract, although the government is trying to find ways out of paying, local media have reported. However, if it does pay, it will exacerbate an already tight supply of dollars, putting more pressure on the shilling.
“The possible payment to Dowans is a huge amount of foreign exchange for our market. If that goes through, it will definitely affect the shilling,” said Yono Mtengule, an economist at National Bank of Commerce.
“The general outlook is that the shilling is still vulnerable to weakening because of the supply factor.” Between last Thursday and Monday, the central Bank of Tanzania traded US$50.05 million on its Interbank Foreign Exchange Market, according to statistics on its website.
The naira NGN=D1 is likely to strengthen further against the dollar due to expected month-end dollar flows from energy companies and weak demand at the official window.
It was trading at 151.70 on Thursday compared with Wednesday’s close of 151.95 as the effect of dollar sales by some energy firms trickled into the market. “The naira is expected to strengthen further early next week as more oil majors sell dollars and the central bank continues to meet demand at its auction,” one dealer said.
The central bank sold US$250 million at 150.31 naira to the dollar on Wednesday, a little shy of the US$256.5 million demanded but equal to US$250 million sold on Monday at 150.40. Dealers said the slowdown in demand at the interbank market was due to buyers purchasing more dollars at the official window due to improved credit lines.
“Most importers are now ensuring that they confirm their letters of credit before they open them, to enable them buy foreign exchange at the official window – and this has reduced pressure at the interbank,” another dealer said.
The kwacha ZMK should hold at around 4,800 to the dollar, within the trading range it has occupied throughout 2011.
It was trading at 4,805 on Thursday versus 4,735 a week ago.
“The market should continue being thin next week, but dollars should come into supply from locals taking advantage of the price,” one commercial bank trader said.
“In the short-term, local demand and supply will have a greater impact on the exchange rate, but the kwacha should appreciate over the long-term as dollars from the high copper prices start coming in.” The kwacha met firm resistance around 4,600 during 2010. On the few occasions it broached that level, it tested but failed to breach 4,550.

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