Robust USD, Corporate Buying Batter Cedi

The unending corporate demand amid a stronger U.S. dollar on the international market weighed heavily on the cedi in the first four months of 2024.

Ending last week, the cedi recorded losses as demand surpassed foreign exchange (FX) liquidity. The cedi on the retail market, USD/GH¢, concluded the week with a significant week-over-week loss of 2.97 percent against 0.90 percent from the previous week.

This resulted in a year-to-date (YTD) loss of 14.11 percent at the end of April 2024. The GH¢ also shed 3.83 percent and 3.32 percent week-over-week versus the GBP and EUR, resulting in YTD losses of 17.63 percent and 12.11 percent, respectively.

“Up ahead, we envisage a continuous weakening trajectory of the local unit this week in the near term as the FX demand-supply disparity remains substantial,” stated Databank, an asset management company that closely observes the market.

So far, data from Databank’s weekly updates suggest Bank of Ghana has supplied an estimated US$270.1million on the FX market as of April 3, 2024 – US$150.1 million on the spot market and US$120 million on the Bulk Oil Distribution Companies (BDCs) FX forward market – to improve liquidity and stabilise the cedi.

In 2023, an estimated US$713.15million was supplied (US$540million – BDCs FX forward | US$173.15 million – spot market).

However, Databank anticipates improved liquidity following the IMF programme approval. “We, however, anticipate improved liquidity conditions towards the end of Q2 2024 after board approval of the second review, which will lead to a tranche disbursement of US$360million under the IMF programme,” it stated.

JP Morgan Research noted the dollar’s resilience, stating: “Despite uncertain macro conditions, the dollar has continued to demonstrate strength – largely thanks to sticky inflation, a resilient U.S. economy and year-to-date highs in yields. Indeed, in a display of U.S. exceptionalism, the greenback has gained against just about every other major currency in 2024”.

It added: “The macro market narrative has shifted from ‘when’ to ‘whether’ the Fed will ease this year, and has taken the dollar higher commensurately”.

At the March 2024 Monetary Policy Committee meetings, Governor Dr. Ernest Addison highlighted the cedi’s relative stability despite pressures.

“The foreign exchange market came under some seasonal pressures in February and early March 2024, but the Ghana cedi continues to recover its value,” he said. “The pressures emanated mainly from the strengthening of the US dollar in international markets, and payments made for the energy and corporate sectors,” the central bank governor said.

Dr. Addison mentioned pressures were compounded by delays and uncertainties associated with the second tranche of the cocoa loan inflow and the World Bank’s disbursement of budget support of US$300million.

He noted the pressures were “mitigated somewhat by continued inflows from remittances, mining companies and the Domestic Gold Purchase Programme”.

However, year-to-date cedi depreciation against the dollar has worsened from 6.8 percent as of the last MPC meetings to 14.11 percent currently.

Constant Capital, an investment advisor, warned of a negative FX supply outlook due to fundamental factors. “In our view, the near-term outlook for FX supply is decidedly negative, due to a panel of fundamental factors,” it stated.

“The disinflationary trend seen earlier in the year was reversed in two CPI readings in the first quarter and inflation remains worryingly elevated in the economy, on rising food and utility prices. Ghana’s cocoa output for the 2023/24 season is expected to be almost 40 percent below a target of 820,000MT, according to reliable sources,” Constant Capital added.

Constant Capital cited other constraints. “Other not-so-strong near-term macros and the uncompleted external debt restructuring exercise continue to constrain FX investment inflow, including particularly portfolio inflow into the secondary bond market, a major pre-crisis source of weekly FX supply. Also, current total government financing in FX from the World Bank complex does not quite match the loss in FX inflow from offshore bilateral and the commercial sources.”

The cedi’s continued pressure deepens as corporate demand, mainly from the energy and manufacturing sectors, remained heightened, according to Databank’s observations.