Speculators driving interbank, retail FX rates gap

Uncertainties surrounding the country’s ongoing access to forex are causing speculations on the FX market – which has effectively driven the spread between cedi depreciation on the interbank and the retail markets.

This is happening despite the central bank’s intervention on the FX market, through its bi-monthly FX forward auction as well as spot market operations.

In January 2022, the cedi lost 0.29% month on month (m/m) and 1.59% m/m on the interbank and retail markets respectively. Meanwhile, the BoG remained active on the market, scaling its bi-weekly FX sale to US$75million in quarter-1 of 2022 – up by 50% on quarter-1 of 2021 – to support the currency.

At the last FX forward rate auction on February 8, 2022, the Treasury sold a total size of US$75million against a total bid worth US$293million demanded by investors across 7- to 45- day tenors. This translated to a bid cover ratio of 3.91x underlining strong US$ demand.

Anaylsts have said that, generally, there is high demand which the market is uncertain how it may be resolved amid the country’s downgrading by both Fitch and Moody’s credit rating agencies – reflecting the increasingly difficult task government faces addressing its intertwined liquidity and debt challenges. Tentatively, this tightens government’s access to international capital markets – further exposing the cedi to deprecation pressures in the course of the year.

Apakan Securities Limited, in its analysis of the currency market, argued that the strong dollar demand by large corporates and offshore investors continues to exert pressure on the local unit, leading the GH¢ to post losses against the US$ in January 2022.

“Risk off sentiments, stemming from fiscal and debt sustainability concerns, also weighed on the GH¢,” Apakan highlighted. “We perceive prolonged US$-GH¢ pressures in the near-term as weaker investor sentiments drive portfolio outflows.”

Usually, the market can fairly determine that there will be cyclical moments in currency; but now, due to the negative ratings on the country, players on the FX market are buying more dollars with intentions to hoard in the expectation that rates will slide upward even further.

Per the Bank of Ghana, last year significant inflows into the financial and capital account in 2021 more than offset the deficit in the current account – resulting in an overall Balance of Payments surplus of US$510million.

A sigh of relief is elicited by the current Gross International Reserves, which stood at US$9.7billion – equivalent to 4.4 months of import cover – as of December 2021. This, according to the BoG, has further increased to US$9.9billion as of January 28, 2022.

Expressing his optimism despite the depreciation concerns of the market, Senior Investment Analyst at OctaneDC Limited, Kwadwo Acheampong, said in an interview with B&FT: “I believe there are no fears at all in the near-term; and the BoG will continue to intervene, even if it has to increase its intervention.

“It is in the medium- to long-term that this could be worrying if risk factors such as increasing oil prices and decrease in cocoa and gold prices occur. The cedi should be stable, or at worst depreciate marginally,” Mr. Acheampong however cautioned. “The BoG needs to continue with its intervention. The wide spread between interbank exchange rates and forex bureau rates should narrow as speculator fears dampen.”

Databank, in its exchange rate outlook, expressed the view that the Ghana cedi (GH¢) remains vulnerable to foreign portfolio outflows amid the elevated import demand.

The heightened uncertainty around Ghana’s fiscal outlook worsened the cedi’s woes in late-2021, after a hawkish policy tone in the US triggered a flight-to-safety by foreign portfolio investors in the third quarter of 2021.

“We expect these conditions to persist in first-half of 2022 in addition to corporate import demand as Ghana’s economy rebounds – also given the low prospect of an early-2022 Treasury issuance on the international capital market,” the assets management company said.

However, Databank remains confident that the BoG’s spot and forward forex sales, together with a tighter GHS liquidity, will help limit the depreciation pressure in 2022.

Projecting the cedi’s position, it stated: “We project the FY22 BOG reference rate at 6.45 per US dollar (±GH¢0.1) and the retail FX rate at 6.80 per US dollar (±GH¢0.1)”.