Investors ditching bonds - Standard Bank report

A new report has blamed the depreciation of cedi against the major trading currencies this year on intensified portfolio outflows from the local bond market.

The September 2018 edition of the African Markets report published by Standard Bank, the parent company of Stanbic Bank Ghana, revealed that the local currency bond market has been hugely affected by negative sentiments, causing foreign investors to sell down their holdings of the local paper.

“Negative sentiment towards emerging markets has prevailed. Some local currency bond markets have been affected by this negativity, especially Egypt, Ghana, Nigeria and Zambia, with foreign investors in those markets selling down their holdings of local paper.

Secondary market yields

“That said, secondary market yields in some of these markets reflect the stressed selling,” the report added.

Upward pressure on Cedi

According to the report, the consequence of this is an upward pressure on the local currency and an increased demand of forex.

The cedi, which was trading at GH¢4.42 to the dollar in January this year, is now valued at GH¢4.78 to the dollar at the interbank rates but trading at GH¢4.9 at some forex breaux in Accra.

7.3% cedi depreciation by September 20

In the year to September 20, the Cedi cumulatively depreciated by 7.3 per cent more than the cumulative depreciation of 4.7 per cent for the whole of 2017.

0.7% cedi depreciation between January and May

Up to the end of May, this year, the Cedi appreciated by almost 0.7 per cent until the emerging market problem started, Bank of Ghana figures revealed.

2017 depreciation against the pound and Euro

In the same period last year, the currency depreciated by 5.5 per cent and 5.5 per cent against the pound and Euro respectively.

Ghana has stronger economic fundamentals – Dr Addison

Central Bank Governor Dr Ernest Addison at the last Monetary Policy Committee meeting stated that the strengthening of the US dollar in the international markets had exerted pressure on currencies in emerging market economies, including Ghana, however “the reason we have depreciated by 7.3 per cent and not 42 per cent in Turkey or 18 per cent in Brazil is because we have stronger economic fundamentals.

Medium term predictions

The African Markets report noted that, “we see US Dollar /Ghana Cedi heading higher over the coming 12 months, rising at an annualised pace of between 5% and 8% in the medium term”.

Portfolio outflows from the local bond market

It noted that the upward pressure on the pair between April and September may well have been exacerbated by portfolio outflows from the local bond market.

However, it said holdings of local bonds by foreigners did not change much in that period.

Repatriation of coupon payments

But, the increased demand for forex may have emanated from the repatriation of coupon payments that were no reinvested, the reported observed.

Turnaround in portfolio flows

A turnaround in portfolio flows, triggering a fresh round of inflows into the market, cannot be ruled out once economic margin flux settles down, it added.

Fundamentals of Ghanaian economy still remain strong

These factors, notwithstanding, researchers and economists at Standard Bank believe that the fundamentals of the Ghanaian economy still remain strong with a tighter fiscal policy.

Ghanaian Balance of Payment much stronger

According to the report, “we are still of the view that the Ghanaian Balance of Payment (BOP) is in a much stronger position than it was between 2012 and 2015 when US Dollar/Ghana Cedi was rising at more than a 20 per centannualised pace. Compared to the period between 2012 and 2015, fiscal policy is tighter.”

This is further augmented by the aggressive posturing of the Central Bank’ Monetary Policy Committee in ensuring that there is more surplus than deficit in the country’s balance of payment, the report said.

“Furthermore, the BoG’s Monetary Policy Committee has adopted a rather hawkish stance. Of course, the trade account is arguably much stronger now too, with surpluses more likely than deficits in the coming years due to a ramp-up in oil production, while exports of gold and cocoa are likely to remain strong as well. This suggests that this wave of selling of bonds, which may be pushing USD/GHS higher, is bound to subside”, the report said.

The African Markets Reveal is a monthly report issued by the Standard Bank Group, parent company of Stanbic Bank Ghana and focuses on the economic and financial outlook of African countries. The report also reviews current economic situations and makes short to medium-term predictions about the economies of African countries.

Governor of the Bank of Ghana, Ernest Addison this week asserted that the Ghana cedi would have experienced a persistent appreciation against the US dollar if not for the challenges facing the emerging markets.

Speaking on Bloomberg TV show ‘Bloomberg Markets: European Open’, Dr Ernest Addison stated that the cedi appreciated against the dollar within the first five months of 2018, till the emerging market was hit with increased U.S interest rates.

This resulted in the depreciation of the currencies of such markets, including Ghana.

“Throughout last year, the currency was relatively stable and in the first five months of this year, it actually appreciated against the US dollar until May when the emerging market problem started and then we started seeing additional currency depreciation, losing almost 7% by September,” Dr. Ernest Addison said

He added that the Ghanaian economy has experienced “a significant turnaround in the macroeconomic fundamentals, fiscal consolidation, a fairly robust balance of payment, development.”

According to Dr. Addision, “all of that improvement reflected somewhat in the behaviour of the cedi” in 2017 and the beginning of 2018.

The Bank of Ghana introduced measures at the beginning of 2018, to halt the depreciating of the Cedi, among which included the withdrawal of both Foreign Currency and Foreign Exchange Accounts in Cedis, at the existing exchange rate over the counter, except for travelling purposes