The Cedi’s Abysmal Performance Worsens in May 2015

The Ghanaian cedi continued its depreciatory trend against its major currencies in May 2015 while the country’s Consumer Price Index (CPI), Producer Price Index (PPI) and Monetary Policy Rate (MPC) continue to remain on high.

The ripple effect of the upward adjustment of fuel prices in the midst of the ongoing power crisis continues to worsen business conditions in the country.

Business confidence in the country remains low as a result of falling commodity prices, rising interest rates, mounting inflation, a depreciating currency combined with an acute power crisis and revenue shortfalls. This was according to business surveys by Bank of Ghana (BoG), Institute of Economic Affairs (IEA) and the Association of Ghana Industries (AGI), which indicated the worsening business environment which is leading to business and job losses.

In other developments, the 1st quarter provisional fiscal data released by the Ministry of Finance and Economic Planning (MOFEP) showed that the country’s total revenue generation amounted to GH¢7.12 billion as against a target of GH¢6.30 billion. Government reduced its expenditure for the 1st quarter for 2015 by GH¢463 million, as an amount of GH¢8.16 billion was spent compared to a target of GH¢8.63 billion.

Currency market
The speed of depreciation of the cedi seems to continue to undermine the effectiveness of the country’s tight monetary stance. The cedi continued its depreciatory trend on the exchange market in May. This partly attributed to the country’s poor macro-economic fundamentals resulting in low investor confidence and export earnings, intense demand pressures from corporate institutions and traders combined with speculations on the foreign exchange market.

The cedi hit a new low at the end of trading in May 2015 on increased dollar buying. This was driven by low export earnings and improved data released by the U.S. which bolstered the case for a U.S. interest rate hike this year. The cedi closed the month at GH¢4.00/$ on the interbank market, resulting in a year-to-date depreciation of 19.95%. Averagely, the cedi depreciated against the dollar by 0.20% and 1.07% on daily and monthly basis in May 2015 respectively.

The cedi’s depreciation against the euro was mixed, as the local currency recorded some bits of appreciation during the month of May 2015. The month of May saw the cedi hitting its lowest against the euro at a rate of GH¢4.43 with a decline in value of 12.33% on 18th May, 2015. The local currency ended the month down by 11.00% against the euro at GH¢4.36.

The cedi lost 0.16% and 1.68% on average basis in May respectively against the pound to GH¢6.10 on the interbank market. The cedi recorded year-to-date depreciation of 18.27% against the pound sterling at the close of May 2015.

Against the yen and yuan, the cedi closed the month with a YTD depreciation of 16.98% and 17.8% at GH¢0.03 and GH¢0.63 respectively. Comparatively, the cedi’s performance against the two currencies in May 2014 was better off, as the local currency had depreciated by 26.14% and 21.27% to the yen and yuan respectively.

The cedi risks deteriorating further against its major currencies in the coming months as a potential inflationary rise could secondarily impact the country’s exchange rate.

Stock market
The stock market built on its progressive performance from April 2015to end May on a high. The expectant payment of high dividends by some traded companies combined with companies’ 1st quarter profitability and a sustained confidence on the local bourse resulted in the high performance in May 2015 as compared to April of the same year. The concerns of worsening economic activities did little to dampen investors’ appetite during trading on the exchange.

Investor sentiment continued to improve in May from the previous month resulting in sustained confidence in the Ghanaian stock exchange. The local bourse in general rose by 3.98% in May 2015 with year-date gain of 4.49%. The financial stock also rose by 5.27% with year-to-date gain of 7.71% during the same period.

Trading Activities
Volume and turnover of traded companies were encouraging in May on account of the growing appetite of investors.

A total of 15.61 million shares changed hands in thirty (31) equities at an amount of GH¢20.20 million. Volume of trade was 33% higher than the 11.74 million shares traded in April 2015. Meanwhile, value of trade was 6% lower than April’s value of 21.67%.

The local bourse market capitalization increased by 2.45% in May to close at GH¢64.58 billion.

The rise in traded equities in May was attributed to Enterprise Group Ltd accounting for about 46% of trades registered for the month with a volume of 7.13 million shares. Other equities which recorded impressive trade volumes during the month under review were CAL Bank Ltd (2.61 million), UT Bank Ltd (1.91 million), Ecobank Transnational Inc. (1.24 million) and Starwin Products Ltd (547,500); making up the list of the top-5 most traded equities.

The markets top five drivers of May’s turnover were Enterprise Group Ltd (GH¢11.64 million), Cal Bank Ltd (GH¢2.79 million), Standard Chartered Bank GH. Ltd (GH¢1.67 million), Guinness Ghana Breweries Ltd (GH¢1.41 million) and GCB Bank Ltd (GH¢479 thousand).

Money market
On the money market, the government’s appetite of borrowing from dealers increased by about 25% in May 2015. This is a result of the Central Bank accepting GH¢4.46 billion from dealers during May’s auction compared to GH¢3.58 billion in April 2015.

Yields on short term bills were relatively low in May 2015 compared to the previous month. On average basis, the 91-day bill was 25.12% as compared to 25.25% in April. Meanwhile, the 91-day bill ended the month under review on high at 25.15% from the month’s start of 25.08%.

The 182-Day bill also increased during May, from a month start rate of 25.74% to a month end rate of 25.89%.

The One-Year and the Two-Year Notes remained flat at 22.50% and 23.0% respectively, as has been the case since March 24, 2014.

With persistent high inflation rate, the surprise increase in monetary policy rate, continual depreciation of the local currency, falling commodity prices, and government’s insatiable borrowing attitude from dealers (resulting in higher yields in T-bills and notes ) compounds the country’s inability to achieve the fiscal consolidation highlighted in its 2015 budget statement as well as its agreement with the IMF.

In the face of slow economic growth in the economy as a result of accelerating inflation, continual depreciation of the cedi, high interest rates, rising debt levels, declining domestic demand and increasing power outages, we expect government to drastically cut back on expenditure; improve on efficiencies in tax collection, not through more taxes; to explore alternative measures and to fully implement its agreement with the IMF.

Ghana risks increased inflation if government resorts to increasing taxes and money printing as a solution to service its debts: both interest and principal amounts.

The cedi depreciation is expected to worsen in the coming months as traders are uncertain of the local currency’s stability. This will result in demand pressures. The cedi may stabilize or appreciate marginally if government is able to secure good rates on its intended Eurobond for 2015.

Emmanuel Danso-Boafo
Research Analyst,
Brooks Asset Management Ltd

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