Ghana’s Cedi To Further Weaken; Global Investment Bank Drops Bad News on Ghana -See More Details

J.P. Morgan, a global investment bank and financial services company, has warned that Ghana’s possible debt restructuring could hurt the local currency even more.

The US-based company says that the change could be important even if Ghana’s central bank changes or increases its foreign exchange (FX) purchase policy in the short term to help the cedi.

In a recent Emerging Market Quick Take, J.P. Morgan talked about the recent performance of the Ghana Cedi. It said that the drop was caused by the Bank of Ghana’s decision to buy dollars from mining and oil companies, which made less foreign currency available on the interbank market.

The global investment bank also said that the loss of confidence in the domestic economy is to blame. It thinks that this has drained foreign exchange reserves and caused volatility.

“The cedi has lost about 60% of its value against the US dollar this year, as uncertainty about whether debt restructuring is needed and how big it will grow.” Since FX reserves have been used up so far this year, the Bank of Ghana (BoG) doesn’t have as much power to smooth out FX volatility.

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It went on to say, “However, we think the main reason for the move to 14.875 (mid) in a spot over the past few days was BoG’s decision to buy dollars from mining and oil companies, which reduced the amount of FX available on the interbank market.”

J.P. Morgan also said, “The current account deficit (CAD) is only a little bit bigger, but the loss of confidence at home has led to a big drain on the financial account, even though portfolio outflows have been fairly small.”

“Based on our risk-reward scorecard, Ghana now looks attractive, but we expect concerns about the scope of debt restructuring to continue to dominate, which could lead to even more GHS weakness, even if an increase in FX forward auction sizes or a reversal of the FX purchase policy gives the cedi some short-term relief,” it said

J.P. Morgan said that the Bank of Ghana’s decision to buy dollars from mining companies has instead caused the FX market to be squeezed and put under more pressure.

The Bank of Ghana (BoG) hasn’t changed the size of the twice-monthly FX forward auctions, which are still set at $25 million, even though the demand has reached $100 million per auction.

“We think that the BoG may need to use the money from mining sector FX purchases to increase interventions or change the FX purchase policy in order to reduce volatility. Since the policy was put in place, the central bank had bought about $84 million by the end of September [2022], and it expects to have bought $500 million by the end of the year,” J.P. Morgan said.