A renewed demand for dollars is threatening to release the local currency’s rare stranglehold over the US dollar since the start of the year.
The heightened demand saw the cedi lose more than 2.7 percent of its value against the dollar in the interbank market last month alone, with further losses suffered since the beginning of April.
In the first two months of the year, the cedi’s stellar performance – appreciating by 4.5 percent – drew commendations from Bloomberg as the best-performing currency against the dollar in the world.
Since then, the novel coronavirus, referred to as COVID-19, has scourged the globe, with economic activities at a standstill and crude oil prices crashing on the back of low global demand.
According to Courage Martey, an analyst with investment firm Databank, following the collapse in oil prices in early March, offshore investors started reversing some of their positions in the local currency.
“This resulted in sharp depreciation pressures over the period, cutting the cedi’s year-to-date gains on the interbank market to 1.33 percent at the close of last week,” he told Business24.
Since the start of the year, the average weekly volume of bonds traded on the local bond market has stood at about GH¢1 billion.
“However, unlike the start of the year when offshore investors were driving the buy side – that is, demanding to buy GHS-bonds – the situation is currently the reverse. Non-resident investors are currently driving the sell side with sell-offs. This has caused an increase in portfolio demand for FX, with a surge in domestic bond yields,” he added.
The government’s 3-year bond issued in January at a rate of 20.75 percent was trading at 21.2 percent as at April 2, while the yield on the 20-year bond issued last August at 20.2 percent rose to 23.5 percent in the same period.
Reserves under pressure
Finance Minister Ken Ofori-Atta, who unveiled the government’s economic policy response to the COVID-19 crisis last week, warned that ongoing capital flight could dissipate the country’s reserves.
“COVID-19 has also sparked off capital flight as a result of related bearish emerging market sentiments and given the high proportion (about 25%) of local bonds held by non-resident investors. We are seeing an increase in demand for dollars which could impact negatively on
foreign reserves…In these apocalyptic times, we must do all we can to conserve and preserve our foreign exchange reserves,” he stated.
The crashing of crude oil prices by 50 percent from US$65.9 per barrel in December 2019 could deny the country valuable foreign exchange earnings of close to US$1 billion this year.
As at end-February, the country had gross international reserves of US$10 billion, one of the highest levels in history and enough to provide 4.8 months of import cover.
A source at the central bank told Business24 the bank is closely monitoring the situation. Asked whether there are plans to sell more dollars to meet the increased demand, he responded that no such plan is currently in place.
The bank’s own response to COVID-19 was to cut its policy rate by 150 basis points on March 18 to 14.5 percent – the lowest since June 2012. Since the cut, the currency has lost more than 2 percent of its value against the dollar.
The central bank said it acted to stimulate lending to the real sector, given the anticipated negative effects on the economy of COVID-19-motivated restrictions imposed by the government.