Currency speculators move in on cedi

As widely expected by financial markets analysts, currency trading speculators are increasingly taking trading positions against the cedi in an effort to reap quick profits from the national currency’s ongoing sharp depreciation. Despite the unexpected rebound of the cedi towards the end of last week – the currency gained some three percent against the United States dollar on Thursday, taking the local foreign exchange market by surprise – investors who took up dollar positions at the start of 2019 are still better off now that their counterparts who invested in any other type of financial instrument at the time.

Even with last week’s surprise appreciation, the cedi had lost 4.7 percent against the dollar by the end of the week. Since the beginning of this year, the Ghana Stock Exchange composite index has declined by 4.58 percent while its financial index has fallen by 0.33 percent. This puts the returns on dollar holdings well ahead of weighted average returns on a portfolio of listed equities.

Similarly, annualized yields on government treasury securities currently range between 14.71 percent for 91-day treasury bills and about 21 percent for seven-year treasury bonds. These fall well short of the current annualized returns of 24.5 percent on dollar holdings derived currently from the cedi’s depreciation. Even corporate bonds – such as the medium-term notes issued by AFB Ghana and traded on the Ghana Alternative Stock Exchange {GAX) currently offer yields of between 22 and 24 percent do not quite match the yields accruing to currency speculators. Indeed, until the cedi’s sudden partial recovery during the last two days of last week, annualized yields for dollar holdings was some 40 percent.

Currency speculators are consequently investing in dollar holdings and to a much lesser extent other major international trading currencies, particularly euros. Unfortunately, such speculative trading is self-fulfilling in that it accelerates the depreciation which thus justifies the investment in currencies in the first place.

Fully aware of the threat this poses to the cedi exchange rate and consequently inflation, the Bank of Ghana is taking steps to curtail speculative demand for forex even as it collaborates with government itself to increase both gross international reserves and supply of foreign currencies on the local forex market, both of which aim to bolster confidence in the cedi going forward and thus stem rising bid prices.

In late February, the BoG issued a new directive aimed at tightening reporting requirements for forex trading and tightening trading margins. The first seeks to prevent trading for sheer speculative purposes and the other seeks to reduce the profitability of forex trading merely for profit. The central bank is also seeking to increase its foreign reserves by US$850 million to enhance confidence on the local forex market and to enable more direct market intervention in the form of enhanced supply of forex on the market to prop up the exchange rate.

Government itself is scrambling to imminently issue up to US$3 billion in Eurobonds. It has also negotiated a US$750 million short term loan from two international banks to give the local forex market immediate enhanced liquidity ahead of the Eurobond issuance which will provide the monies to amortize the syndicated bridging finance facility.

Government is also looking to draw down the US$300 million, minor cocoa crop season component of this season’s annual cocoa receivables-backed syndicated loan as well as the US$647 million first tranche of the US$2 billion bauxite backed infrastructure development facility negotiated with China’s Sinohydro Corporation. Add to all these the final US$200 million tranche of the US$918 million in balance of payments support being received from the International Monetary Fund.

Both government and BoG officials privately admit that their sense of urgency in propping up the local forex market is heightened further by the fear of increased speculative trading.

In 2014 and 2015, speculative trading was a major factor behind the cedi’s sharp depreciation of some 30 percent in the first half of each of those two years although in each year the cedi clawed back much of its lost value during the second half of the year as forex traders sold dollars to take profits.

The situation this year though is different for two opposing reasons. On the upside, Ghana has, since late 2016, been making sustained trade surpluses, brought about largely by increased oil exports and reduced petroleum imports, much of the light crude oil imported for power generation having been replaced by locally sourced natural gas. This has given the cedi more fundamental economic strength than the last time speculation by currency traders fueled cedi depreciation.

On the downside, however, Ghana is now suffering severe net outflows from its capital and financial account because of dis-investment by foreign portfolio investors in government’s debt securities. The previous period of speculative trading driven cedi depreciation was ameliorated by the net portfolio investment inflows being enjoyed by Ghana at the time.