Ghana's economy vulnerable to portfolio outflows - Economist

Ghana’s economy remains vulnerable to foreign portfolio outflows, says Courage Kingsley Martey, Senior Economist with Databank Research, in an assessment of the latest data on the country’s balance of payments (BoP) released by the central bank.

According to the Bank of Ghana’s summary of economic and financial data published ahead of its policy rate announcement today, the external sector suffered much from the impact of the coronavirus pandemic.

The BoP contracted to a deficit of US$632.47 million, equivalent to 0.95 percent of gross domestic product, at the end of 2020 from a surplus of US$1.34 billion, equivalent to 2 percent of GDP, in 2019.

This was largely due to the decrease in the capital and financial account balance to US$ 1.55 billion (2.3 percent of GDP) in 2020 from US$3.07 billion (4.6 percent of GDP) in 2019.

“The first point to note is that the dynamics in the balance of payments show that Ghana is still vulnerable to foreign portfolio outflows, and this is an inherent risk built into the Ghana cedi. The situation requires continued vigilance and strict regulatory oversight over FX flows to avert volatile FX market conditions,” Mr. Martey said in an interview with Business24.

“But the modest recovery in oil prices on the world market is good for oil export receipts and flows to the Ghana Petroleum Funds to beef up the reserves,” he added.

Ghana’s trade surplus also reduced by 0.4 percentage points to 3 percent of GDP, while the current account deficit widened from 2.8 percent to 3 percent of GDP.

Notwithstanding the current external situation and the effect on the forex market, the Governor of the Bank of Ghana, Dr. Ernest Addison, earlier this year was confident that the reserve levels, coupled with other measures to be implemented by the government in 2021, should see the local currency remaining stable throughout this year.

The cedi, which depreciated by 3.8 percent against the dollar in 2020, outperformed many of its peers on the African continent. The cedi began 2020 trading at GH¢5.54 to a dollar and closed the year at GH¢5.76 to the US currency. As at Friday, January 29, the cedi was trading at GH¢5.76 to a dollar.

This year, the BoG plans to issue a total of US$775 million through its bi-weekly forward foreign exchange auctions.

Fitch Solutions, the international research firm, has forecasted a slower depreciation of the cedi to the dollar this year.

It expects the cedi to lose just about 3.1 percent of its value against the dollar, largely due to expected recovery in the country’s exports on the back of higher international oil prices, improved cocoa exports and continued strength in gold shipments.