Cedi Needs More Than Controls – Analysts

Foreign currency controls and higher interest rates will do little to mitigate pressure on the cedi unless the authorities do more to roll back the large fiscal and current-account deficits, say analysts assessing the Bank of Ghana’s (BoG) policies to halt the currency’s pernicious slide since the start of the year.

According to Fitch, the ratings agency which has published consistently grim assessments of Ghana’s fiscal situation in the past year* the country’s budget deficit, which averaged 11 percent of GDP between 2012 and 13, is the root-cause of the current economic difficulties.

“The decision to increase interest rates and introduce new foreign exchange controls is unlikely to ease pressure on the cedi, in the absence of accelerated fiscal consolidation to address growing domestic macroeconomic imbalances,” the agency said in a statement.

Analysts at Barclays also said the current account deficit, which came in at 12.3 percent of GDP last year – from 12.1 percent in 2012 – is likely to remain in double-digits as gold production and the metal’s price continue to struggle, adding that this portends further pressure on the cedi.

Giving a gloomy prognosis, the Barclays analysts stated: “Notwithstanding the recent actions from the BoG, we see few positive catalysts in the near-term that could reverse this trend…The weakening fundamental picture, Ghana’s high external vulnerabilities and adverse debt dynamics leave it in a challenging position, in our view.”

The BoG last week received endorsement from the Ministry of Finance for its measures to boost the cedi, but the currency began trading yesterday 0.4 percent weaker than it was on Thursday – when the central bank raised its main lending rate to 18 percent, on top of fresh regulations to limit the use of dollars for transactions.

The new regulations – which among others outlaw transfers from one foreign exchange account to another and prohibit over-the-counter withdrawals of foreign currency except for travel purposes – will reduce speculation and improve the availability of forex in the banking system, said Millison Narh, Deputy Governor of the BoG.

But Philip Walker, an analyst at the Economist Intelligence Unit (EIU), said he still expects the cedi to depreciate, though at a slower pace than in January. “Wide fiscal and current-account deficits will weigh on confidence in the cedi, he told the B&FT. “Another issue outside Ghana’s control is current emerging-market jitters over US monetary policy and growth in China.”

Currencies from the Argentine peso to the South African rand have slumped in the past weeks as global investors, responding to the prospect of higher, more attractive interest rates in the US, sold off assets in emerging markets. While no such dramatic pull-out has happened in Ghana, some analysts see a link, however tenuous, between the challenges of the cedi and other currencies under pressure.

That aside, the sentiments on Ghana have soured since the occurrence of election-driven fiscal slippages. In 2012, this caused the budget deficit to climb to 11.8 percent of GDP, nearly thrice its level in 2011.

For 2013, the gap was worse-than-planned — 10.2 percent compared to a target of 9 percent – and investors are worried that an expensive wage bill and weak revenues threaten this year’s fiscal estimates.

“One indirect effect [of the BoG’s measures! would be if the higher interest rate depresses business activity, which in turn hits tax revenue,” said Philip Walker.

Rising inflation, which hit 13.5 percent in December, is also a concern for investors – as much as it is for consumers – amid j signs that economic growth, which slowed to 4.1 percent in the first nine months of 2013 compared to 8.7 percent in the prior year, may also be faltering.